Despite initial brief rise in euro in reaction to downgrade of U.S. AAA rating by Standard & Poor's over the weekend, the single currency then retreated sharply in Asian and European sessions on massive risk aversions due to further weakness in global stock markets. Major Asian indices (including Nikkei and Hang Seng) fell over 2% after Friday's selloff, European indices are all down as well with DAX currently dropped over 3%, followed by FTSE-100 (-2.2%) and STOXX 50 (-1.67%), Dow futures is still down over 200 points and traders expect big drop when NYSE opens. Early boost from ECB buying Spanish and Italian government bonds also seen fading out, the central bank said over the weekend that it would actively implement its bond-buying program and the news did lift some peripheral bond prices, pushed the bond yields down by 80 basis points. Some economists suggested that the bond purchase by ECB could only improve liquidity to the debt markets temporarily and it would have very limited help to the actual fiscal problems in the eurozone. News that German government officials signaled opposition to boosting the size of the EFSF (eurozone rescue fund) and ECB's bond buying program was also seen pressuring the single currency. Euro dropped sharply from intra-day high of 1.4432 to as low as 1.4151, some bids at 1.4250 were absorbed but buying interest is still seen at 1.4150 and further out at 1.4100, on the upside, offers from big U.S. names are now reported at 1.4240-50 and also 1.4300, there are market talks of solid offers from 1.4400 all the way up to 1.4450 with huge stops placed above the latter level.
The British pound also down in London session on carry trades, sell stops below 1.6380 and 1.6340-50 were triggered. More people came out to give verbal support to the U.S. after the downgrade by S&P, Warren Buffett said Berkshire Hathaway is still buying U.S. Treasuries even with the S&P's lowering the top AAA rating to AA+ , he also indicated that U.S. debt is still AAA to him. Meanwhile, there are speculations that one or more of the rating agencies may put UK on a negative outlook watch as the Bank of England may lower its growth forecast for the coming quarters. Corporate selling (related to EUR/GBP) was noted in London session, after stops at 1.6340 were triggered, more stops are reported at 1.6290-00 and more at 1.6250 and obviously 1.6220 (large size) with bids expected ahead of both levels. On the upside, offers are now seen at 1.6370-80 and 1.6400 with huge stops placed above 1.6480 and 1.6500.
Against the Swiss franc, the greenback also rebounded from fresh record low of 0.7480 (option barrier at 0.7500 was tripped) on dollar's broad-based recovery, however, offers from various parties are still noted around 0.7650-60 and further out at 0.7690-00 with stops only emerging above 0.7700 and 0.7750.
USD/JPY is the only pair that went lower among other dollar majors on massive risk aversion and safe-haven flows to Japanese yen, Dow futures once down over 250 points. Although the Ministry of Finance Noda repeated himself and warned that further intervention will be conducted to curb yen's appreciation after a phone conference with other G7 finance ministers, USD/JPY continued to fall as more and more traders believe solo intervention by MOF would not be enough to push Japanese currency lower and higher USD/JPY only provided better level to sell the pair. Having said that, bids are still seen at the level of 77.50 and 77.00 with stops only emerging below 76.70 and 76.20, offers are lined up from 78.30 up to 78.50 and good size selling interest remains at 79.00-10 and 79.40-50.
EUR/USD Mid-Day Outlook
Daily Pivots: (S1) 1.4121; (P) 1.4209 (R1) 1.4364; More.
EUR/USD's rebound form 1.4054 lacks follow through buying and weakens sharply into early US session. the break of 1.4239 minor support mixes up near term outlook and we'll turn neutral first. On the upside, note again that break of 1.4537 resistance is needed to confirm resumption of rebound from 1.3837, or more consolidative trading would be seen. on the downside, below 1.4054 will bring another fall to test 1.3837 support.
In the bigger picture, EUR/USD is still trading above medium term trend line support from 1.1875 (now at 1.3835) and thus, rise from there should still be in progress. We'd continue to favor the bullish case that correction from 1.6039 has completed with three waves down to 1.1875 already and above 1.4939 will target 1.5143 resistance first. Break will affirm the bullish case of long term up trend resumption for another high above 1.6039. However, sustained trading below the mentioned trend line support will indicate that there should at least be one more medium term decline, possibly for below 1.1875, before correction from 1.6039 completes.