The June Euro futures contract erased earlier gains against the U.S. Dollar and is now trading lower for the session. Overnight the single currency attempted an upside breakout after Spain’s well-received auction of government debt. As concerns about a possible bailout of Spain eased, shorts likely covered their positions, but refreshed once it became clear that buyers were not going to chase the Euro higher.
This trading action underscores the possibility that there is more to the Spanish debt crisis than just the bond auction. Although it may indicate that Spain has temporarily passed an important test of investor confidence, the country still faces an excessive debt issue, falling real estate prices and extremely high unemployment. In addition, the government must address the issue of fiscal austerity under the threat that the European Central Bank can at anytime curtail its current debt buying program.
With Spain selling 2.54 billion Euros of 2- and 10-year government bonds, figures that exceeded the top end of the government’s planned range of 2.5 billion Euros, the June Euro jumped higher, but could not attract enough buying pressure to exceed any important tops to change the main trend to up on the daily chart. This was a sign that buyers were backing way from the Euro and suggested that it was short-covering rather than fresh buying that was driving the market higher.
In hindsight, it looks as if the initial response to the bond auction was merely a relief rally and that Euro investors realized that Spain still face serious problems that are not likely to go away over the near-term.
Technically, the June Euro is still in a downtrend on the daily chart and will remain in this position until an important top is violated. Investors have done their part to defend the single-currency at the 1.3000 level, but no one seems interested in prolonging the rally by buying strength. Basically, the Euro is still in the hands of strong sellers.
This morning the June Euro is trading on the weakside of a short-term 50% price level at 1.3109 and threatening to trade below a major 50% price level at 1.3070. Sell stops are likely building under the 1.3000 to 1.2987 area, but heavy shorting as the market approaches these levels could trigger an acceleration to the downside once this area is breached.
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