Risk-aversion sparked broad-based declines in the European and Asian equity bourses overnight, with pressure on the major currencies against the dollar and yen. The euro came under heavy selling pressure in the New York session following S&P's credit downgrade of Spain to AA and placing a negative outlook. This follows yesterday's downgrade of Portugal and Greece and raises fears of a Eurozone debt contagion, prompting greater scrutiny over which country might be next.
The US equity bourses clawed into the black after the FOMC monetary policy announcement and prompting the greenback to relinquish its earlier strength. The Federal Reserve left interest rates unchanged at 0%-0.25% and leaving its mantra that current conditions warrant exceptionally low levels of the federal funds rate for an extended period. Kansas City Fed President Thomas Hoenig again dissented, saying that leaving rates for an extended period was no longer warranted and because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates immediately.
Debt Contagion Weighs on Euro
Traders are questioning whether Italy will be the next Eurozone nation to be downgraded following S&P's ratings cuts to Portugal, Spain and Greece. Volatility will remain high, with the euro susceptible to sharp, choppy trading over the coming weeks until further details over the bail-out package to Greece is hammered out. Amid growing fears that the deficit contagion will spread throughout the Eurozone, government officials are likely to scramble to quell market worries, which was evident in the overnight spike in Greece's borrowing costs by nearly 18% in its two-year note.
In the coming session, traders will turn to Germany's April labor report, the Eurozone M3 money supply and business sentiment surveys.
EURUSD hangs around the 1.32-mark with interim resistance eyed at 1.3230, backed by 1.3265 and 1.33. Additional ceilings will emerge at 1.3340, followed by 1.3375 and 1.34. On the downside, support starts at 1.3170, followed by 1.3130 and 1.31. Subsequent floors are eyed at 1.3050, backed by 1.30 and 1.2960.