##{"id":59306,"date":"2011-12-14T10:08:06","date_gmt":"2011-12-13T23:08:06","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/12\/14\/what-now-for-eurusd\/"},"modified":"2011-12-14T10:08:06","modified_gmt":"2011-12-13T23:08:06","slug":"what-now-for-eurusd","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/12\/14\/what-now-for-eurusd\/","title":{"rendered":"What Now For EURUSD?"},"content":{"rendered":"

\n\tBy Kathleen Brooks, Research Director UK EMEA<\/span>, FOREX.com<\/span><\/p>\n

\n\tThe single currency is looking extremely weak today. It has fallen to as low as 1.3057 and is being battered by the perfect storm of political risk, technical factors and holiday-thinned markets.<\/p>\n

\n\tIn fairness the breach of the 1.3150 level earlier today that has left EURUSD<\/span> at its lowest level since January is no surprise. On a long-term basis the cross had made a series of lower highs since trying but failing to break above 1.50 in May. First it was 1.47, then 1.45, 1.42 and the recent decline saw 1.38 and 1.35 get taken out fairly quickly, now 1.3150 has been breached. After some congestion around the 1.42- 1.45 zone, EURUSD<\/span> has been on a clear downtrend for the last two months. But the question to ask is where will this cross go now?<\/p>\n

\n\tThe trouble with the single currency is that it is incredibly resilient and tends not to fall in a straight line, instead we have seen it embark on a slow grind lower. Because 1.30 is such an important psychological level and the market is already short of dollars (the most short it has been since mid 2010) then we could see some stickiness around this level.<\/p>\n

\n\tHowever, in the medium-term we think that EURUSD<\/span> could be heading for the mid-20’s. There are both fundamental and technical factors supporting this.<\/p>\n

\n\tFundamental:<\/strong><\/p>\n

\n\t• The trigger to the decline in the euro today was comments from German Chancellor Merkel. She said that the ESM<\/span> – the Eurozone’s<\/span> long-term rescue fund – would not see the upper limit of its funds raised. The ESM<\/span> is EUR 500bn<\/span> in size, which isn’t enough to cover Italian and Spanish liabilities in the medium-term if they get into trouble.<\/p>\n

\n\t• Added to that Merkel has also reiterated that the ECB<\/span> will not act as the currency bloc’s lender of last resort and there will be no mass buying of sovereign debt by the Central Bank. This is considered the only solution to ease the near-term risks of this crisis, so understandably investor sentiment has dipped on these comments. So political risk is a major concern for euro bulls right now.<\/p>\n

\n\t• There was a lot resting on last week’s EU summit and as the market digests the result they have found the solution wanting and there has been that very little done to deal with the current brevity of the situation.<\/p>\n

\n\t• Added to the political risks, growth is weak and there is a large sovereign downgrade risk for the entire currency bloc.<\/p>\n

\n\t• Of course, some of the peripheral countries may want a weaker euro to boost their exports and re balance their economies – so a weaker single currency could actually help relieve the debt crisis…<\/p>\n

\n\tTechnical:<\/strong><\/p>\n

\n\t• We have known for years now that the fundamentals of the currency bloc were weak, but the euro remains a resilient currency.<\/p>\n

\n\t• However, the technical indicators suggest that the Euro is losing some of this resilience. Added to this, when liquidity is thin momentum can build very quickly.<\/p>\n

\n\t• EURUSD<\/span> is below its daily Bollinger band and it is also below the base of its daily Ichimoku<\/span> cloud chart, which suggests a firm downtrend is emerging.<\/p>\n

\n\t• The longer-term and shorter-term directional indicators all point lower including the MACD<\/span> and RSI<\/span> on the daily chart and the 30-minute chart, suggesting that downward momentum is building.<\/p>\n

\n\t• 1.2860 is the 100% retracement<\/span> of the 1.4940 high reached in early May. This could act as good near-term support if we get below 1.30.<\/p>\n

\n\t• In the very near-term 1.3050 and 1.3022 could act merely as resting places if the bears manage to break this key psychological level.<\/p>\n

\n\tSo to conclude, as we have already pointed out, a break of 1.30 suggests that the Eurozone<\/span> debt crisis has reached a critical level, but in the long-term a weaker currency is just what the stressed peripherals need.<\/p>\n

\n\tOf course there is a chance that a dovish<\/span> Fed or even QE3<\/span> from the US next year could keep a lid on EURUSD<\/span> losses. EURJPY<\/span> is probably a purer play on euro weakness, but this pair is also at risk from currency intervention by the Japanese authorities. So short-term bearish strategies are the way to the trade the euro in our opinion, especially since the market is so short the euro already and central bank reserve diversification has been a good support for the euro in the past.<\/p>\n

\n\tSo the euro may be breaking down, but we have been here before, so tread carefully. There are likely to be plenty of short- squeeze rallies as we head into year end, especially since the market is so short euro already, so there could be better levels to enter a short euro trade for those who are patient enough to wait.<\/p>\n

\n\tCharts:<\/strong><\/p>\n

\n\tEURUSD<\/span>: daily chart with MACD<\/span> and RSI<\/span> and Fib retracement<\/span>. This cross has made a series of lower highs since peaking in early May. Support could come in at 1.2860 – the 100% retracement<\/span> from the 1.4940 high.<\/p>\n

\n\t $\"\"$ <\/p>\n

\n\tEURUSD<\/span> has also broken beneath its daily Bollinger Band, a key bearish signal.<\/p>\n

\n\t $\"\"$ <\/p>\n

\n\tThe views expressed are the author's, not FNArena<\/span>'s (see our disclaimer).<\/p>\n

\n\tDisclaimer<\/strong>: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD<\/span> contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. ?<\/em><\/p>\n

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\n\tTechnical limitations<\/strong><\/p>\n

\n\tIf you are reading this story through a third party distribution channel and you cannot see charts included<\/span>, we apologise<\/span><\/span>, but technical limitations are to blame.<\/em><\/strong><\/p>\n

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