EUR/USD: 1.2485
The Euro has finally broken below 1.2500 as the concerns over Spain continue to mount and the country’s bond yields head inevitably towards 7%. Matters were not helped today when Egan Jones – a small ratings agency – downgraded Spanish debt again to BB-, the 3rd downgrade in a month, causing a swift move to 1.2460 slightly overshooting our first support level of 1.2484, and coming up bang on the second one. It is not too far away from there right now, but things are looking rather ominous for the Euro.
The euphoria over the Greek polls seems like ancient history as far as the Euro is concerned, as the headlines from Spain continue to deteriorate. Spanish PM Rajoy has ruled out any need for Spain to seek external help to recapitalise the banking system but the market is not so sure, and if it were to come about that a bailout is required, you can be sure that the Euro is going a lot further south. Elsewhere in Spain, Retail Sales collapsed, and it is reported that the banking system needs Eur 100 bio to bail it out.
Interestingly the equity markets have gone the other way today on hope of a positive outcome from the Greek election, with European equities up over 1% (Dax +1.18%, CAC +1.37%, IBEX was -2%), while the S+P has closed up 0.9%. The bits and pieces US data today was mixed and had little effect on the markets.
Technically the Euro, having rallied to and met minimum upside target at 1.2623 on Monday, unwinding the charts in the process, has been able to continue to the downside with greater ease. 1.2460 still holds and will possibly continue to do so through the Asian session. A break would see progress towards 1.2430 and then 1.2400. If seen, I would expect this to be a slow move ratcheting down in choppy fashion given that the markets are overwhelmingly short, it is inevitable that squeezes are going to occur along the way. Below 1.2400, we might see a bit of an acceleration towards 1.2325 - unlikely just yet - and the longer term target is 1.1875 – the 8 June 2010 low.
Bear in mind that a daily close below 1.2500 means that we have closed –albeit very slightly – below the neckline of the long term head shoulders formation that I have been watching for the last couple of weeks. Given this occurrence, the long term target is somewhere around 1.0350. Don't get too excited, this won’t happen today or indeed in the next 6 months, but is something to keep in the back of your mind.
To the topside, we now need to regain 1.2500 and preferably 1.2525. Above this, the downtrend line is strong, currently at 1.2620 – Monday’s high & previous long term support. This is beginning to look a long way away, but you never know, given the weighting of the market to the downside. If we do see 1.2620 again, the next target would be 1.2650 (23.6% of 1.3283/1.2460) and then 1.2700.
One other thing that may slow the upside a little, is that the Dollar Index,(DXY) is currently at 82.52, just below major resistance at 82.60 (61.8 % of 88.70/72.69 )
Today sees EU Consumer Confidence (May) and US Pending Home Sales – nothing major. Use 1.2460/1.2525 as a short term guide.
