Euro Debt Issues and US Debt Ceiling Weigh on FX Spread Betting Markets
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Euro Debt Issues and US Debt Ceiling Weigh on FX Spread Betting Markets

 Euro Debt Issues and US Debt Ceiling Weigh on FX Spread Betting Markets
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When looking at the problems in Europe it seems rather bizarre that the single currency should be holding up as well as it is against the US Dollar on the FX spread betting markets.

This is especially true given fears of a meltdown in the European Banking system, which could be brought about by a Greek default on its sovereign debts, as well as concerns about contagion to Spain and Italy.

Part of this robustness can be put down to the role of the European Central bank in flagging up a series of rate rises in the coming months. In addition, there is some misplaced optimism amongst spread betting investors that policymakers in Europe will do whatever it takes to stave off the potential nuclear option of a default of a sovereign nation leading to a contagion to Spain or Italy.

Reports over the weekend appear to suggest that a partial default is now being considered amongst policymakers in an attempt to ease the debt burden on Greece.

Fears about contagion have also increased over the past week as Italy has been drawn into the crisis on the back of political discord between the finance minister Tremonti and Prime Minister Berlusconi.

Concerns about the solvency of Italian banks ahead of the release of this week's European banks stress test results haven't helped either, sending Italian 10 year bond yields to their highest levels since 2002, above 5.40%.

The other side of the coin though, is the weakness of the US Dollar on the back of the loose monetary policy in the USA and a possible extension of easy monetary policy, after Friday’s abysmal payroll numbers.

Furthermore, there are concerns over whether there will be political agreement between Democrats and Republicans about the raising of the debt ceiling by August 2nd, a failure of which could mean the US defaulting on its debts.

US policymakers continue to be poles apart with taxes remaining a key stumbling block to further agreement.

President Obama and the Democrats are arguing for a balanced approach between spending cuts and tax rises, totalling around $4tn over 10 years. On the other hand, Republicans continue to argue for a much smaller package of around $2tn, funded mainly by spending cuts.

This nervousness has increased as the deadline has moved closer with ratings agency Moody's warning that a failure to reach agreement would result in them putting the US credit rating from "AAA" on review for a downgrade. Meanwhile, S&P warned last month that they would slash the ranking to "D" if the US couldn't pay its debts.

Consensus at the moment appears to be that the US will step back from the precipice, with US Treasury secretary Timothy Geithner reassuring at the weekend that the "US is not going to default".

New IMF chief Christine Lagarde has also said that she didn't believe that the US authorities would allow such an event to happen, as the consequences of such an event on the financial system could be seismic.

Certainly US bond yields currently aren't factoring in any concerns about an agreement being reached. However, this might change if the various parties don't start to come closer to an agreement as the deadline date approaches, and market participants become nervous about a US government shutdown, and a US default.

The current EUR/USD chart has broken below a medium term support level around $1.4170 early this morning, however the medium term uptrend continues to remain intact while the price remains above the 200 day MA at $1.3910.


EUR/USD Spread Betting Chart


Today's break below triangle trend line support at $1.4170 from the May lows at $1.3970, if sustained, could well provoke further declines towards the $1.4000 level and then the 200 day MA at $1.3910.

The technical analysis shows that just below the 200 day MA we have primary trend line support at $1.3710 from the June 2010 lows at $1.1880.

For now the single currency and the US Dollar remain embroiled in a battle of the ugly sisters.

China's continuing support is underpinning some of the falls in the single currency, with sharp squeezes higher, while an agreement on the debt ceiling in the US could provoke a sharp US Dollar bounce at the expense of the Euro. Especially if policymakers in Europe fail to convince financial spread betting markets of a credible solution to the on-going sovereign debt problems in European markets.

Original article written by CMC Markets as of 11 July 2011.



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'Euro Debt Issues and US Debt Ceiling Weigh on FX Spread Betting Markets' edited by DB, updated 11-Jul-11


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