EUR/USD held in relatively well in European and US trade, although the pair was certainly not helped by comments from Slovak Prime Minister Robert Fico that a eurozone break-up ‘is as equally possible as the alternative’, which suggests he sees a euro break-up as 50/50.
Calls from Moody’s that Spain’s rating would be on review through September for a possible downgrade also weighed on markets. The US session low of 1.2488 was enough to entice the euro bulls, who may also struggle on the back of month-end flows (given we feel there may be some funds that need to re-balanced given the recent strength of the EUR, which could be headwind for the EUR).
Most of the attention in the media focused on the meeting between the French and Spanish leaders, however don’t be fooled by the negative rhetoric that Spain will wait until it receives clarification of the conditions for assistance. This should not come as a shock and is perfectly logical that the Spaniards would want to wait to find out the terms before applying for help to bring down yields. The near-term price action of EUR/USD is difficult to predict, however we feel the market has done a good job in pairing back expectations that Ben Bernanke will lay out a clear-cut path to QE3, in fact we would go as far as saying the market is going into Jackson Hole expecting disappointment, which could support risk forex.
The psyche of the market will be thrown into question and if the Fed Chairman simply reiterates the recent minutes, stopping short of providing a bias of any clear-cut action/inaction in its September meeting, it will be interesting to see how risk assets react given the recent positing back into the USD. Any real disappointment will clearly see sharp USD inflows and we feel going long on dips in EUR/USD at 1.2420, just above the July uptrend could be what traders are looking at. A closing break above the August 23 high of 1.2590 over time would see us adding to long positions.