The EUR/USD came into today's NY trading session with the pair holding onto its gains from yesterday post-FOMC. However, it did not manage to breach the 1.44 level, and as we got underway in NY we had French and Italian bank shares coming under heavy pressure on rumors of a possible downgrade to France.

Both Moody's and Fitch re-affirmed their AAA ratings with stable outlook, and so its S&P that again can cause strong market turmoil if it decides, like it did with the US to knock France's rating down a notch.

The EUR/USD traded at 1.4240 at 9:22AM ET settling back down into the range we have seen in this pair over the past 2 weeks.

  • The failure to move above 1.44 created a double top in the pair.
  • We breached the 21, 55, 100, and 200 ema's in the 1H timeframe, stalling out the momentum we had in the pair from yesterday.
  • If we have further downswing in the pair, we target the 1.42 pivot from yesterday and below that we would have the 123.6 extended retracement of the post-FOMC announcement rally near 1.4150.

France has moved into the crosshairs of the market recently, with the yield between it and Germany widening out.

From Bloomberg: "Investors currently demand about 90 basis points of extra yield to buy 10-year French debt rather than German bunds, even though both carry AAA grades from the major rating companies. That spread is almost triple the 2010 average of 33, and compares with 17 in the second half of the previous decade. The cost of insuring French debt rose to a record today."

Italian bank shares came under heavy pressure as well, which was another pressure point on the EUR:

Here's Italy's FTSE MIB:

We have pared the gains from the open and are now trading at fresh lows for the week. We saw share suspension for  Italy's Intesa Sanpaolo amid the sell-off.

The pressure on Italy and European shares comes even as yields in Italy and Spain eased for a 3rd day as the ECB continues to make its presence felt in the market.

Investor sentiment, volatile this week already, looks set to have another down session today, with the EUR leading the charge downward. Commodity currencies were also weaker as US futures were lower and we opened cash equities trading with a sharp tumble in the Dow (-1.4%) and S&P500 (-2.4%). If the rally from Tuesday gets wiped away we are looking at "risk-off" trading dominating which favors our safe havens (JPY, CHF, USD) at the expense of higher yielders (EUR, GBP) and commodity currencies (AUD, NZD, CAD).

Nick Nasad
Chief Market Analyst