EUR/USD took a plunge in pre-NY trading as it was revealed that Spain would dissolve its parliament in September and call fresh elections on November 29th.

From Reuters: "Spain's blue chip index extended losses on Friday after Spanish prime minister called for early elections and media reports said Europe's rescue fund may not be in a position to lend Greece its second tranche of loans.

Spain's IBEX 35 fell 0.7 percent, while the FTSEurofirst 300 index of top European shares was down 0.9 percent at 1,079.78 points."

Spanish bonds had already come under pressure overnight as Moody's said they are close to downgrading Spain's credit rating by one notch, which had pressured the EUR against its rivals overnight.

From FT: "Then, after crawling off lows, futures took another hit shortly after 0600 BST when Moody's said it had put Spain's credit rating on review for a possible downgrade, citing continued funding pressure facing the Madrid government as the economy struggles for traction.

The credit rating agency's move has revived eurozone sovereign credit angst, forcing "peripheral" spreads wider. "Core" paper, such as Bunds, are in demand, pushing yields lower by several basis points as havens are sought."

From Reuters: "Rating agency Moody's put Spain on review for a possible downgrade on Friday, adding to concerns that a Greek rescue package has done little to halt the spread of Europe's debt crisis. Moody's move to place the Aa2 government bond rating on review cited concerns over growth and said funding costs would continue to be high in the wake of euro zone leaders' bolder moves to curb the Greek crisis last week.

That added to a sense that Spain - and Italy - are still firmly in the firing line, and the euro and Spanish bond prices fell in response."

The EUR/USD slid to 1.4230 in the wake of the announcement, and is close to completing a swing projection of the down move we had in yesterday's session.

A similar fall would target the 1.4217 area. In the 30-minute timeframe we are using the red 21 ema as resistance to any pullbacks, and the EUR is going to be hard pressed to rally with the negative headlines swirling around Spain as well as the overall market pressure being brought to bear as a result of the situation in the US.

The EUR/CHF slid to a new record low at 1.1391, while the EUR/JPY fell to 110.50, following the Spanish announcement.

From more on EUR/JPY see our Technical Update: EUR/JPY to Confirm Bearish Continuation with Double Top

Traders Shun Risk as US Debt Impasse Lacks Progress

The EUR is also facing pressure as investors shun riskier assets as the US debt impasse continues to show lack of progress. Yesterday, a vote that was scheduled on the House Republican's debt ceiling vote was postponed and delayed until today, which means that House Speaker Boehner did not have enough votes to pass the measure.

The uncertainty over the US situation is causing a move by investors and traders into the safety of the CHF and JPY against higher yielders, though the USD managed to hold its own against the two. The USD/JPY did slide overnight to a fresh low this week and a fresh four month low at 77.45.

Key data on tap today in the US includes the first look at 2nd quarter GDP, the Chicago Business Barometer (Chicago PMI), and the final version for July of the UMich Consumer Sentiment.

Nick Nasad
Chief Market Analyst