Just as it seems that the Euro has found a bottom, at least temporary, more bad news pushed it lower. Fitch Ratings downgraded Spanish debt by one notch and EUR fell. However, this sell off was relatively small and came nowhere near to the low of 1.2150 in EUR-USD. Some could say that the Spanish downgrade was expected, simply a formality following actions against all other countries. Others claim that we had seen the worst for the Euro and that’s why it didn’t plunge more on Friday.

While most attention was given to EUR-USD and EUR-JPY, other Euro pairs are also interesting. The Pound cross, for example, dropped to 0.8420, almost the low from 2009. Never mind that GBP has a lot of problems of its own, it is still stronger that the Euro, at least for now.  On the long term chart, this creates a very important support level. If it is broken, major down trend for this pair should continue, but if it holds, a good size rebound might be in the works.

It would be easy to simply write off the Euro and assume it will keep falling. However, if budget deficits are as big market movers as they appear to be, the Pound might find itself in the cross hair, too. There are concerns the U.K. will struggle to reduce its deficit. So far 6.25 billion pounds of spending cuts were outlined on May 24. More reductions will be proposed in an emergency budget on June 22. Meanwhile, U.K. Treasury, plans to sell 4.25 billion pounds of a 2.75% gilt due 2015 on June 2, and 2 billion pounds of a 4.5 % security maturing in 2034 a day later. All said, British government plans thirteen auctions in the July to September period.

On fundamental bases, EUR-GBP could go either way. That’s the current picture. With unpredictable news still dominating markets, one can expect sharp turns either way. Long term technical picture is a little more clear though. The prevailing trend is down, which eventually should lead to prices moving through the 0.8400 support. If this happens, chances are high for this pair to drop to 0.7800, perhaps by the end of the summer. Should a reversal happen here, upside will probably be no higher than 0.8900-0.9000, before the downtrend resumes. In a perfect world, a smaller price run up from current level would be great. The 0.8400 level would prove to be even more important, so when (if) it is finally broken, it would leave no doubt about direction. Next week might be pivotal for EUR-GBP, setting the tone for next few weeks/couple of months.

Mike K.