Although the first days of this week were bank holiday in many European countries, the appreciation of the US dollar compared to the Euro (from 1.3255 last Friday to 1.3137 at the time of writing) cannot be left out of consideration. There are couple of reasons behind this movement:
- Disappointing macro data (from US job market, EU purchasing manager index etc.) pushed investors towards a risk-off mood.
- Spanish government bond yields were pushed high again by comments about the banking sector struggling with record non-performing loan (NPL) ratios.
- Additionally, focus in Europe is shifted nowadays more towards local politics. There will be parliamentary elections in Greece this Sunday, but more importantly France is expected to elect a new president on Sunday. The hopes that Nicolas Sarkozy would be re-elected are very weak. The socialist frontrunner Francois Hollande - having vast majority - emphasised, however, several times that he considers re-negotiating former agreements about European bailout absolutely necessary. This causes serious worry on the market.
All this supports our view that the EUR/USD might reach 1.3 level again soon. Actually it tested it three times from February 2012, therefore the support becomes weaker and weaker. In the case of a significant US dollar appreciation, we could see 1.26 again. In the less likely scenario of a Euro appreciation, the first resistance level can be found at 1.34.