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EU Summit Failure Risks Credit Downgrades in Europe

By Joel Kruger, Technical Strategist
12 December 2011 06:46 GMT

  • EU Summit fails to offer any real constructive measures
  • FT outlines major critiques from latest EU meeting
  • European Central Bank under pressure to buy more bonds
  • S&P could strike in early week after warning of potential downgrades

While the Euro and risk correlated assets have come back under pressure in early Monday trade, we are actually a little surprised to see that the setbacks have been rather mild considering the EU Summit results. An article in the Financial Times summarizes the Summit’s failed efforts rather well, highlighting the following key points:

1. “The decision to set up a fiscal union outside the European treaties will do nothing whatsoever to resolve the Eurozone crisis.”

2. ‘If you want a fiscal union, nothing less than a full treaty change will do.”

3. “A fiscal union set up outside the European treaty would face severe legal and practical limitations…. Nor can it issue Eurozone bonds.”

4. “We now have no treaty change, no Eurozone bond and no increase either in the rescue fund or in ECB support.”

5. “The EU fell short on every element of a comprehensive deal.”

All of this is quite negative and from here pressure will mount on the European Central Bank once again to buy more bonds should the peripherals come back under pressure. Another key theme this week will revolve around S&P, with the rating agency likely to respond to warnings it made last week on ratings of European countries. S&P said that it would asses the progress from the EU Summit before making any moves and it looks as though the rating agency will be disappointed with the progress or lack there of from the Summit. As such, we would be on the lookout for some downgrades this week which could open the door for an acceleration of broad based risk liquidation and flows back into the US Dollar.

ECONOMIC CALENDAR

EU_Summit_Failure_Risks_Credit_Downgrades_body_Picture_5.png, EU Summit Failure Risks Credit Downgrades in Europe

TECHNICAL OUTLOOK

EU_Summit_Failure_Risks_Credit_Downgrades_body_eur.png, EU Summit Failure Risks Credit Downgrades in Europe

EUR/USD: The latest corrective rally appears to have stalled out by 1.3550 and the market looks poised for a bearish resumption to challenge the critical October lows at 1.3145. A break below 1.3145 is significant and will open the door for deeper setbacks over the coming weeks and months into the lower 1.2000 region. Ultimately, only a daily close back above 1.3550 will negate outlook and give reason for pause.

EU_Summit_Failure_Risks_Credit_Downgrades_body_jpy2.png, EU Summit Failure Risks Credit Downgrades in Europe

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

EU_Summit_Failure_Risks_Credit_Downgrades_body_gbp2.png, EU Summit Failure Risks Credit Downgrades in Europe

GBP/USD: The market correction out from the recent lows at 1.5420 appears to have finally stalled out and we will be looking for a daily close back under 1.5560 to confirm bias and accelerate declines. A close below 1.5560 should accelerate declines towards 1.5420, below which will open an even deeper setback to retest critical support by the October lows at 1.5270. Ultimately, only back above 1.5800 would delay and give reason for concern.

EU_Summit_Failure_Risks_Credit_Downgrades_body_swiss1.png, EU Summit Failure Risks Credit Downgrades in Europe

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

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12 December 2011 06:46 GMT