Currencies | Nov 04 2014
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
The single currency broke a key level of support today and fell to its lowest level for more than 2 years. After clearing last week’s low of 1.2485, it dipped to a low of 1.2440 during the Asia session, before picking up on the back of the Eurozone PMI data. 1.2440 could act as support in the short term, as this pair started to look oversold earlier, however, 1.2518 – today’s high – could attract some selling interest.
From a technical perspective, in the short term, there could be some respite from the selling pressure on EURUSD. However, the medium-term outlook remains bleak as the fundamental picture remains murky. Below we list some of the key fundamental concerns for the EUR:
1, Europe vs. the US
Even if the bad news regarding Europe has been priced in, the EUR’s decline may not be over as the USD ascendency takes hold. This week, we could see a resurgent dollar weigh further on the EU, particularly if we get strong ISM readings and a solid payrolls report at the end of the week.
2, The ECB
Even if the ECB does nothing at this week’s meeting, we could still see a fall in EURUSD. The ECB is not expected to change rates or announce fresh measures to boost the economy; however Draghi and co. could flesh out more plans for a potential QE programme, like the purchase of corporate bonds. The pressure is rising on the ECB to take more action after the BOJ surprised the markets last week. Thus, the market may price in further ECB loosening even if the ECB sits on its hands at this week’s meeting, which could be EUR negative.
3, Greece
Fears are starting to rise over the stability of the Greek government. The centre-right government, which is holding on to power by a thread, needs to cobble together a majority in order to elect a new President. So far it has been unable to do so, and if it can’t do so by February then it will have to hold new elections. The problem with new elections is that the radical left-wing party SYRIZA, is ahead in the polls. This causes two problems: firstly, SYRIZA is anti-bailout, and anti-EU, secondly, the government has been so preoccupied with forming a coalition that it has let its reform schedule slip, invoking the ire of the Troika even more. The result is that Greek bond yields are back above 8%, considered danger territory (see figure 1). Although contagion has been limited so far, the risk is that rising Greek bond yields cause other peripheral member states, including Spain and Italy, to see their bond yields rise in unison. Thus, it could be a nervous four months until the election.
The technical view:
As we mention above, EURUSD fell to a fresh low earlier, and broke below key support at 1.2485. The next key level of support includes 1.2440 – Monday’s low. We continue to believe that there could be further downside for this pair, and believe that any strength could be faded.
In the longer term, the next key level of support to watch out for includes 1.2223- the 200-month moving average.
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