Forex: Eur/Usd Still Dominated By Fiscal Challenges

Despite the strong moves seen around the Sunday open, the currency market stood still throughout the European and early U.S. trading hours. Contributing to this range-bound market was the fact that most U.K. banks are closed today, in observance of May Bank holiday, which added to the lack of overnight momentum from Japanese and Chinese markets being closed.

Volatility is set to increase during the U.S. trading hours, when ISM Manufacturing numbers hit the newswires. That report is then followed by a barrage of red-flag economic releases that run through each region during the rest of the week.

The reaction to the EU having just agreed to sign a $146 billion bailout package for Greece may have been for the Eur/Usd to hold ground, as the fiscal situation in the Euro-zone now at least has some clarity. However, the Eur/Usd dropped 100 pips during the Sunday session, while the European debt and CDS markets sideways, in-line with global risk markets.

The speculation will increase that market participants are not fully convinced that the Greek bailout will stop any other debt crisis in Europe, and that will leave the short side of the pair in play, especially in the sessions that global equity markets are running flat. In the current environment, with debt insurance and inter-bank lending suffering, the S/P Down/Usd Up link will be very strong.

In overnight trading, S/P futures found some support in the 1185.00 area; the same place that has held the market for almost a month. However, the outlook of the equity market is highly dependable on how the U.S. ISM numbers will print at 10:00 ET, and more importantly, how the market will interpret them.

A report that prints lower that the expected 60.0 read will probably send S/P futures spinning lower, while helping the dollar index break above the 82.50 area. On the other hand, a read higher than 60.00 on the ISM could help S/P futures push towards the 1200.00 area, and aid just a little Aud, Cad, and Gbp.

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