The bearishness surrounding the single currency just passed a tough test in the wake of the ZEW Survey results for the month of February in both Germany - posting mixed prints - and the euro area, bettering January's reading and the median. The sudden up-move from the area around the mid 1.3300s to session highs above 1.3370 was ephemeral, lasting just a few minutes after the cross retraced those gains and slipped back to the comfort zone in the region of 1.3350. In addition, December Construction Output in the euro bloc contracted to the lowest level since April, and however a second tier event, the FX community should not be fooled: the euro zone remains well into recession territory. Germany, instead, may be finding its way out of it.
… All roads lead south
The current scenario depicts the EUR/USD failing to escalate to higher levels, and the more it fails, the more convinced are market participants that February highs above 1.3700 is in fact a signal that the market has topped.
In combination with the above, yesterday speech by ECB's Mario Draghi kept the neutral tone, neither affirming nor denying the recent concerns about euro strength, leaving the status quo post ECB meeting, and of course, the door wide open for further pullbacks. Furthermore, nobody speaks anymore about the improved health of the banking sector - if there is any - with every weekly LTRO repayment figures, as they seem to have fallen into a secondary role so far. In addition, the G20 gathering ended up being a non-event after officials practically 'ignored' the main issue hovering over the FX markets at the moment: Japanese monetary policy concentrated in a weaker yen.
All in all, and with the ECB sitting on its hands and watching its peers playing 'currency wars', the next risk event for the single currency comes along with the Italian elections over the weekend. Results seem to get blurrier every day with the former PM Silvio Berlusconi now within touching distance of the coalition between Pier Luigi Bersani and Mario Monti. Expectations are for the euro to remain sidelined around 1.3350, although framed within a broader context of increasing bearishness, at least until this event unfolds.
Should the bears keep pushing the cross to deeper levels, the initial support lies around 1.3320, home of the 23.6% Fibonacci retracement (July 2012 lows - February 2013 tops upside) and the 55-day moving average; followed by the area of 1.3220/50, where sit the uptrend set from 2012 lows, the Lower Bollinger band and the top of the cloud, ahead of 1.3136 (100-day moving average) en route to the 38.2% level at 1.3075
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