By: Christopher Lewis
The EUR/USD had a somewhat bullish session on Tuesday as traders reacted to decent a decent bond auction in Spain. Also, the yields in several European countries came down, and as has been the correlation lately, the Euro gains in that scenario. However, the end of the day saw a bit of selling in not only the Euro, but most things not Dollar-related.
The European Union continues to tread water, and the situation in Greece may finally be coming to a head as the Greeks and debt holders simply cannot come to an agreement with the bonds. The “restructuring” of Greek debt that is being negotiated is a default, however – what really will matter is whether or not the investors can agree to terms with Greece as to the size of haircuts. If the investors and the Greeks cannot come to terms, the Greeks then wouldn’t be able to get the next tranche of bailout funds from the IMF that is supposed to be used for the bonds payments coming due in late March. This would also mean that we would see a dreaded “credit event”.
If this happens, there would be unknown repercussions as credit default swaps suddenly get activated, and nobody knows who owns what at that point in time. In other words, we get a massive credit crunch again. Needless to say, if that happens – the Dollar will skyrocket in value as the Euro falls just as hard.
Euro Rallies, But Just
The EUR/USD pair did rise in value over the session, but looking at the daily chart you can see it lost over half of the gains for the session. We aren’t even at a large resistance area, and to me this shows just how little it takes to shake the confidence of Euro bulls at this point. There seems to be an air of inevitability to the fall in this pair, and every rally continues to be a selling opportunity.
.jpg "EUR/USD Daily Outlook 1/18/12")
Going forward, a daily close below the 1.26 could rapidly see this downtrend accelerate. The next major support below that level is the 1.19 level, and I would be aiming for that long-term if we get this signal. As for buying, I cannot think of a reason to do so currently but would entertain the idea if we can see a daily close above 1.31 – a long way from here.