The markets waited nervously this morning ahead of the bond auction in Portugal, and with the results now coming through it appears as this though this has gone slightly better then expected, with the markets absorbing almost 1.25bn of debt, virtually the total amount planned. This of course was the main event for today, with the problems in Europe continuing to dominate all the markets, in particular European and US equities and of course the forex market, with the bond auction in Lisbon taking place against a backdrop of political tension and a forecast that GDP would shrink in 2011. In the last two days we have seen bond spreads tighten ahead of today’ auction, but with the auction now over we can expect to see these  widen once again in due course.

The most interesting reaction was in the EUR/USD which promptly fell sharply on the news, breaking back below the 1.3000 level once again, and reversing the overnight rally and that of the last few days, which has largely been fuelled by warm words from Japan and China, as the two continue to support the euro in favour of the US dollar. From a technical perspective the longer term outlook for the euro dollar remains firmly bearish, and should today’s action hold below the 1.3000 region, then the 200 day moving average will continue to play a pivotal role, exerting  some heavy pressure to the downside. Immediately above of course we now have the deep price congestion which is acting as an area of deep resistance and as such adding a further barrier to any short term recovery for the euro. In the longer term therefore we can expect to see a test of the 1.2625 region in due course, and if this is breached then a deeper move could send the pair towards 1.2500 and beyond.