Catalonia could severely test the EUR’s mettle
Since early September the EUR’s rally looks like it had stalled and could now be on the verge of turning into a bear market now there are growing fears that Catalonia’s bid for independence from Spain could reignite a wider Eurozone crisis.
Those fears were echoed by the head of the conservative grouping in the European Parliament Manfred Weber. The reasoning goes that if Catalonia breaks away from Spain then other regions could follow basically leading to the dismantling of Spain.
The consequences of that could be a default on Spain’s national debt if it cannot be parcelled out effectively among the newly independent states and could spur independence movements across other European countries. Also, those new states may not be allowed to stay in the EU never mind the Eurozone and would have to go through a lengthy application process to rejoin as new countries.
With so much uncertainty and a plethora of possible negative outcomes, it is therefore not hard to see the potential for a crisis that would make Brexit look like the warm up act to a chaotic situation that would rock the very foundations of the European project.
In practice it probably won’t come to that. Catalonia will probably win more autonomy and send less money to Madrid - that won’t be enough for those determined on independence, but it might satisfy the majority of the Catalan population. Providing it doesn’t degenerate into complete acrimony that solution is probably still achievable with good mediation.
While Spain’s crisis works itself out, it could see the European Central Bank being more cautious on winding down its massive stimulus programme for fear of rocking the boat in some of the Continent’s fragile bond markets.
Unfortunately, the Catalan situation is yet another reminder of the fragility of the Eurozone and the need for greater political integration and centralisation for the EUR to survive. However, this need flies in the face of growing nationalism that seems to be flourishing across Europe not only against the European project, but in some cases even against nation states.
How those two opposing dynamics are reconciled (or not) will be key to the long-term survival of the EUR.
TECHNICAL ANALYSIS: EUR/USD appears to be poised for more losses
EUR/USD continued to grind its way lower last week and looks set to start giving up more gains made this year. The pair continue to push down on the lower Bollinger band, but other indicators such as the daily RSI are not yet in oversold territory, so more losses could be in store.
Also, it appears a head & shoulders pattern was formed in the month to Sept 24, which is generally a bearish sign plus the pair are moving further below the 50-day moving average — though are a long way from the 200-day MA.
Support can be seen around 1.1714, 1.1704, 1.1688, 1.1669. Resistance can be seen at 1.1763, 1.1775, 1.1787 and 1.1833.
By Justin Pugsley, Markets Analyst, MahiFX