The first two days of this week's trading have been extremely volatile with negative headlines driving the direction of the majors in an absence of economic data. The threat of a Greek default is weighing on the EUR while French banks continue to face pressure over funding concerns.
The EUR/USD bounced 200 pips yesterday in the North American trading session only to shed most of those gains this morning after continued pressure from Italy, France, and Greece. Support for the EUR that was seen after the FT reported Chinese interest in Italian faded this morning after a disappointing Italian bond auction . Italian 5-year debt yielded 5.59% vs. 4.93% at the previous sale in August. The auction also had a weak bid to cover ratio of 1.28 from 1.93.
French banks continue to be pressured from downgrade concerns and a WSJ article cited a lack of dollar funding facilities for some French banks. The French CAC40 is the weakest European bourse, trading lower by 2.20%.
The pressure on the French banks is a direct result of default fears by Greece. The 2-year Greek note yielded for the first time above 75% while the 10-year bond was yielding 25%. These levels show the incredible amount of stress on Greek paper and market expectations of a Greek default.
Due to the pressures in Europe the EUR has been volatile the last two days but the EUR/USD failed to make a new low below 1.35 and moved back to even on the day. The pair has traded between 1.3700 and 1.3550. Short term technical indicators are oversold, much like many French banks, though headline risk is the key in this trading environment. Additional resistance is found at 1.3835 while a break of this week's low may have scope to 1.3430.
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