EUR/USD: Euro Slips on Economic Uncertainties

The Euro slipped against the US dollar today as the single currency faces uncertainties in the economic front. Corporate earnings reports are also spurring demand for the safety asset.

A complaint by Thomas Pringle, an independent member of the Irish parliament, on the 500 Billion-Euro European Stability Mechanism has reached the Luxembourg-based EU Court of Justice, setting an impediment to developments in the bailout fund. The highest court of the European Union weighs claims that the firewall violates EU law and should be banned in its current form. A hearing is scheduled for today, with a ruling possible as soon as the end of the year under a fast- track procedure.

Also, Moody’s Investors Service reduced the credit-ratings of Catalonia and four other Spanish regions. This is just about a week after upholding Spain’s credit-rating to below investment grade. According to a statement dated yesterday, the ratings firm stated that Catalonia was reduced two steps to Ba3 from Ba1; Extremadura was lowered to Ba1 from Baa3; Andalucia was slashed to Ba2 from Baa3; and Castilla-La Mancha was cut to Ba3 from Ba2, while Murcia dropped to Ba3 from Ba1. The decision was “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs,” the ratings firm said.

In addition, Juergen Stark, a former executive board member of the European Central Bank, told CNBC that the European Central Bank has “crossed red lines” by overstepping its monetary policy remit and operating in the realms of fiscal policy and politics. Stark said the ECB should not be enacting programs such as its latest bond-buying scheme, called the OMT (Outright Monetary Transactions), with the aim of helping governments refinance their debt, as high yields on Italian and Spanish bonds are an accurate reflection of the countries’ sovereign risk.

Across the Atlantic, Of the 20 companies in the S&P 500 that have provided guidance for the fourth quarter during the current earnings reporting season, 18 have slashed their forecasts, according to Goldman Sachs. “Although guidance tends to be downbeat, this is especially negative,” wrote Goldman’s David Kostin, in a note to clients over the weekend. The strategist sees this negativity leading to a 14 percent drop in the S&P 500 this quarter.

In consideration of the effects of these economic fundamentals on risk confidence in the markets, a sell bias is suggested for the EUR/USD. Be cautious though of price corrections as these are still likely to occur.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.