EUR/USD Falls 118 Pips On Renewed Fears And Levels to Watch Next Week October 1st 2012

The Euro fell 118 pips versus the dollar last week on renewed fears about Europe's handling of the Debt Crisis. The week started with a slew of negative Spanish data, tax receipts through August fell by 4.6% but government spending rose by 8.9%. Spain had a budget deficit of 4.77% of GDP in this year’s January-August period, compared to 3.81% a year ago. The deficit was 50.1 Billion Euros.

Speculations arose regarding the size and duration of the ECB's OMT program. The German tabloid Bild claimed that ECB's lawyers are checking to see what size/duration the bond buying program may reach before it breaches EU treaties. The reason for this is, according to Bild, expected legal roadblocks by opponents of the program.

Spain unveils a set of budget and economic reforms

Spain unveiled a set of budget and economic reforms on Thursday. The speculations last week were that this step will be a stepping stone to an official request for a bailout. Spain has been reluctant to accept a new bailout deal because of the political fallout at home. But if the government can create the impression that the cuts/reforms are not being forced by outsiders, the job of convincing the public to accept the reforms may become easier.

The budget and reform package is a mix of new taxes and ending some tax breaks plus some spending cuts and structural reforms. The reforms will focus on liberalizing the energy, services and telecom sectors.

New taxes on energy will be created to “promote the use of green energies”. Good to see that even in the deep crisis Spain finds itself in, its still reluctant to let go of the “green energy” pipedream. Pre-crisis Spain was one of the countries that doled out the most subsidies for “green energy” projects like solar. It consequently had to cut some of those subsidies and renegotiate some of the deals with private investors.

Several tax breaks for companies as well as a tax break for properties will be eliminated. A new tax on short-term capital gains and a wealth tax are projected to raise 1.7 Billion Euros.

Wage of government employees will be frozen for a 3rd year in a row and only 1 in 10 retiring workers will get replaced. This was similar to Greece's pledge, but not only was Greece unwilling to keep this pledge, it instead increased the number of government employees. Whether Spain will do a better job of this remains to be seen.

Spain's Bank Stress Test results very close to market expectations

On Friday the long awaited Spain bank stress test results were announced. Spain's banks will need 59.3 Billion Euros in extra capital. This estimate is very close to the expected 62 Billion Euros. Seven out of the 14 tested lenders will need extra funds, will the government owned “bad bank” Bankia needing the most, 24.7 Billion.

Also on Friday France also unveiled its budget, mainly focused on tax rises and keeping government spending stable. The goal of the budget is to narrow France's budget deficit to 3% of GDP next year from this year's 4.5%. France will tax those earning over 1 million Euros a year at a new rate of 75%.

While campaigning the current French President Hollande didn't hide the fact that this will essentially be a envy tax. He famously said the goal of the 75% tax “is not to collect a single euro in the state coffers” and then went to complain about the high salaries. I suspect he will be proven right, there is no way a tax rate of 75% will bring in more revenue then the current 45% rate. France also increased the top marginal tax rate from 41% to 45%.

The Euro closed the week at 1.2857, down 118 pips. Next support below is seen at 1.2823, followed by 1.27 and 1.2750. If those levels break, the 1.2550 – 1.2588 area may provide support, followed by 1.2450 and 1.2400. To the upside, the 1.2974 – 1.3000 area will provide resistance. Further up, a clean break above the important 1.3000 level may extend the Euro's gains to the 1.3144 – 1.3171 area. Above that, the next resistance level is at 1.3283, followed by the 1.3384 level. If that level gives way, next resistance stands at the 1.3485 – 1.35 area. You can see the levels for next week on the chart below.

Click Here to Leave a Comment Below 0 comments