20th January Euro FX overview
20th January 2010
Currency overview
Focus on the Euro (EUR/USD)
The Euro has continued to be under-pressure this month, a follow on from the bear trend it had settled in over the course of December. Whereas most USD crosses the USD had retraced the best part of the moves seen over December, the Euro only just managed to retrace to the significant 38.2% Fibonacci level. The start of this week has thus seen the market move markedly lower.
Thoughts from the trading floor
From a pure technical point of view, the market has now settled into firm short-term bear trend. This month’s highs of 1.4580 coincided with the 38.2% Fibonacci retracement level of the losses seen over December. Thereafter the market formed a perfect daily flag formation. This morning we have seen the confirmation and break of the flag trend-line at 1.4295. This level also coincided with 200-day moving average. Thus technical bears will now be entering short-positions targeting the significant lows made mid last year of 1.3737 to 1.3828. A break below here could then set the market up for a “double dip” to March ’09 lows of 1.2450. We would need a sharp rejection of today’s break to ease this pressure and set the market up for a bullish bounce. Although the balance of probabilities do not support this outlook, a break back up through 1.4350 may be enough to squeeze the short out and cause a significant move back to 1.4600 and over. Much will rest on whether the market can hold the daily close below 1.4217.
The fundamental factors supporting the continued weakness in the Euro currency lie mainly with the fiscal deficit crises gripping some of its members. The situation regarding Greece is well known. Portugal, Ireland and Spain are also “looking over the precipice” at the moment and should the fiscal crises spread to these countries, the outlook for the Euro-zone will suffer greatly. It seems unlikely that Germany, France or the ECB can aid the situation in these countries. Any form of intervention poses a significant ‘moral hazard’ and will most likely be seen that way by the markets. On the other hand, not intervening seems to be leading to a steady deterioration in sentiment at the same time. One can say that the Euro-zone and the ECB are “stuck between a rock and a hard place”.
Bull View
The bulls will need the market to hold and stabilise around the 1.4000 handle in order to avoid a further rapid deterioration of the Euro. They will hope that the market can ‘forget’ about the Greece deficit problems and that the other at risk Euro-zone members do not follow Greece into the mire.
Bear View
The bears will cite the daily bearish formations as a key reason to support their fundamental view point. They will look to force a close below the 1.4200 handle today and then attempt to make further inroads over the course of the next week. A turn in sentiment in equity markets, which helps the cause of the USD, may then act to accelerate losses in the Euro.
Futex View
We favour the bears. We will look for the market to test down to the 1.3737-1.3828 significant weekly support area. The daily break and close below the 200-day moving average line is a significant technical event.
