EUR USD (1.3145) Narrow ranges and sideways trading currently seem to accompany a popular search for gloomy news. For instance, the Spanish bond auction yesterday proceeded as well as anyone could have hoped at the start of the week. The auction was comfortably oversubscribed at yields just below the closely-watched six percent mark. However, the eventual yield could have been guessed even before the debt sale; the only unknown was the level of demand, which was satisfactory. So, why were market participants so gloomy? Another bit of ‘news’ from yesterday was an unconfirmed report of a French sovereign downgrade, which sent markets lower temporarily. French officials quashed the talk, but the market reactions also revealed investors’ current pessimistic sentiment. If market convictions were not so fragile, traders might have reasoned that a French downgrade is not the end of the world. On the previous downgrade of multiple sovereigns by S&P on January 13th, the euro recovered starting on the next trading day and European equities rallied for the following three months. So, the tendency to bearishness seems hardly justified from the auction or from the prospect of a sovereign downgrade. We concede that FX positioning is unlikely to reflect any large winners or losers at the moment (see Market Bias), so the preference for bearish news may just be ‘imported’ from the equity markets. As previously stated, below the stabilisation point at 1.3235, the euro is still at risk of a decline to 1.2935 and then to 1.2805.
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Deutsche Bank