The sound you hear is the other shoe dropping in Spain today

EUR/USD intraday: further advance.

Pivot: 1.2875 Our preference: Long positions above 1.2875 with targets @ 1.2935 & 1.296 in extension. Alternative scenario: Below 1.2875 look for further downside with 1.284 & 1.282 as targets. Comment: the pair has broken above its declining trend line and should post further advance.

The sound you hear is the other shoe dropping in Spain today. Late last night Standard and Poor’s cut Spain’s debt rating to one level above junk. The reasons given were growing economic and political risks, with the Spanish government considering a second bailout. The debt rating for the country was lowered two notches to BBB- from BBB+. S&P also assigned a negative outlook to the nation’s long term rating and lower the short term sovereign level to A-3 from A-2.

According to the rating agency, lowering the outlook, “reflects our view of the significant risks to Spain’s economic growth and budgetary performance, and the lack of a clear direction in eurozone policy”. It added, “the deepening economic recession is limiting the Spanish government’s policy options”.

“The capacity of Spain’s political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining”. Adding to Spain’s woes, Moody’s. which had put Spain at Baa3, is expected to follow the S&P downgrade soon.

Following the announcement, the EUR moved lower and tested support at 1.2825. The EUR has rallied over the last few hours. Most of the selling overnight has come from leveraged funds managers, especially after the Spanish downgrade and the moves higher have been due to short positions getting “squeezed” out. Market participants are indicating that there are stop loss orders building above the 1.2900 level.

Having sold off to the 1.2825 level, technical indicators are beginning to turn negative. Rallies in the currency will probably be less potent moving forward, and the next anticipated target would be the 1.2760-65 area.





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