The single currency could rebound versus the greenback following news about recapitalizing 16 mid-sized banks in the debt ailing European countries of which could pass hardly the recent EU banking stress tests in an action targeting the EU struggling backing system after last week ECB'S decision of offering 3 months loans for the European banks in an coordinated action with the Fed, SNB, BOE and BOJ for underpinning the US dollar liquidity into the European banking system for longer time as this has been allowed for just one week by the ECB which can be read as an action of restoring confidence and giving durability of the funds liquidity in this system but in the same time, it can be read easily as a precaution action for saving these banks from what can be worst with having default in Greece as these loans can not be read as a growth stimulating action in this time while cutting interest rate can be the most required suitable action and it can be unavoidable with persisting of the current struggling economic conditions which drove down EU Manufacturing PMI index and services PMI index well below 50 as what we have seen yesterday in the flash reading release of September EU Manufacturing PMI index which has gone lower in the contracting territory to 48.4 while it was expected to be 48.6 from 49 in August and also EU Services PMI flash reading index of September which came down to 49 while it was expected to be above 50 at 51.11 from 51.5 in August.
From another side the single currency could gain with growing ambitious hopes of having new decisions can restore the confidence in the markets from the next G20 meeting during the weekend with the current hopes of having new agreement between Greece and the creditors troika next week after stopping last Tuesday with no ability to come out with a new deal can save Greece from default next month by giving it the next waited 8 billions euros part of its bailing out plan which has been prepared by EU, IMF and ECB.
These new hopes have come to light some of the weights on the single currency which has started this week under pressure following the European Economic and Financial Affairs Council meeting which has come with no results to open this week at 1.3689 after closing last week at 1.3795 and after it could fill this gap by the announcement of Fed's meeting results, it came back under pressure again as the triggered dovish sentiment by the Fed's avoiding again injecting new funding in a form of a new QE3 or hinting to it satisfied with turning $400 billions of its holding of less than 3 years treasuries notes to longer term treasuries driving up the average maturity of its 1.6 trillions of treasuries to 100 months driving the 10 years treasuries notes yields down to new historical low yesterday at 1.72%
while the equities markets participants have not seen the required simulating measures in the Fed's plan which looked as a Fed's restructure plan targeting the bonds market more than the stocks which have come under pressure with a real dovish US assessment by the Fed showing growing downside risks facing the US economy from the financial markets with the current weak labor US market and the pressure on the housing market which lead it to reinvest its holding of $885 Billion in the mortgages back securities again with no cut.
That's beside the hits which have dragged the equities markets down by the worries EU countries credit rating which have increased by S&P downgrading of Italy's short term and long term debt from A+/A-1+ to A/A-1 and also the doubts about the US banking system creditability which have grown by Moody's downgrading of BoA, Citi Group and Wells Fegro last Wednesday which has been backed to the current lower ability of the US Government to support them in the case of having harder financial situation amid the debt crisis in the Euro area and the current slower US growth pace expectations which dampened the commodities and energy prices and the stocks which are depending of them
That's beside the political situation in US which forms another risk as what has been seen of hardness in reaching a political agreement for hiking the US debt ceiling for avoiding bankruptcy last month which shows that having an agreement for financing such big banks or bailing out one of them can face monetary and financial difficulties.
God willing, after EURUSD had broken this week its recent supporting levels at 1.3702, 1.3635, 1.3554, 1.3494 and 1.3424, it can face again supporting level at 1.3384 whereas it could rebound this week and in the case of breaking it, it can face another supporting level at 1.3243 and breaking it can lead to 1.3088 before the psychological level at 1.3 and 1.2873 which has been recorded low of this year on the 10th of last January while the way of ascending can face resisting levels at 1.36, 1.3693, 1.3795 which could not be broken this week too in a dovish price action sign and in the case of breaking it, the pair can meet another resistance at 1.3843 before 1.3935 which has been reached following the ECB's decision to offer US dollars loans for 3 months to the European banks.
FX Market Strategist
Walid Salah El Din