By: Christopher Lewis
EUR/USD had a fairly quiet session on Monday as the Americans celebrated Martin Luther King Day. The lack of volume certainly played into the lack of movement, but there was a downgrade of the EFSF bonds of one notch due to the several downgrades by S&P on Friday. With this in mind, there could be more bearish pressure in this market over the next several sessions. With that being said, the European stock markets still managed reasonable gains for the day.
The Friday bearish engulfing candle suggests that there was already bearish pressure mounting, and this latest round of news will only add to it. The 1.26 level below has been massive support so far, and under that area there is only air for quite some space. Certainly we are approaching a “put up or shut up” moment in the European Union crisis as the currency is ready to fall off of a cliff at this point.
The US dollar continues to get a bid in general, as many other currencies are falling against it simultaneously. However, the Euro has the distinction of falling against almost everything, and this shows just how weak the currency is overall. For example, the EUR/JPY pair is at 11-year lows, the EUR/USD pair has fallen below a 20-year consolidation support line recently, and the EUR/CHF continues to grind lower even though the Swiss National Bank has announced they will defend a level just 80 pips below current rates!
Looking Over the Edge
The EUR/USD pair is sitting just above the 1.26 line, which is an area of significant support. The level has produced a bit of a bounce so far, but only mildly so. The chart shows no0 real significant support until we get as low as 1.19 if this level gives, and as it looks like “air”, this move could be sudden and brutal. One has to think it is only a matter of time.
.png "EUR/USD Daily 1/17/12")
A daily close below the 1.26 level has me short again, and holding on until 1.19 or so. There will be bounces from time to time, but they will simply set up for more selling as the problems in Europe haven’t be addressed, and seem to be structural in nature. I cannot see a scenario below the 1.3050 level that would compel me to buy at this point.