Euro Falls On Spanish Woes, With Scope For A Deeper Decline?

Includes: FXE, UDN, UUP
by: FXstreet

The euro resumed its decline versus the dollar late NY session on Tuesday, and extended below 1.2850 today, as investor worries over the eurozone crisis persist and markets are back to trading at the rhythm of European headlines.

While Greece still weighs, Spain remains in the eye of the storm as uncertainty grows over when the country might request a bailout. Spanish Prime Minister Mariano Rajoy said in an interview that he was ready to seek a bailout if its debt financing costs stayed too high for too long.

As if the market was chasing Rajoy, Spanish 10-year borrowing costs rose above 6% while European stocks slumped, adding pressure on the shared currency.

Euro hits 2-week low, where to now?

The EUR/USD remains in one-week downtrend off 1.3171, 17 Sep high, and keeps on printing lower lows and lower highs on daily basis, leaving analysts wonder whether a top is in place at the 1.3170 area, or if it is a merely corrective movement ahead of another leg higher.

The truth is that there seems to be no consensus among analysts about the long-term fate of the cross as the downside is being limited by Fed's aggressive stance and speculation that QE3 could last until 2014. However, in the nearer-term the EUR/USD seems to have scope for a deeper correction.

The TD Securities team considers that the short-term bear-trend appears intact. "For the EUR, yesterday's lift driven by Draghi headlines reiterating what we already know, meant gains were built on flimsy foundations. That turned out to be the case as the rally stopped just short of bear trend resistance near 1.2974. The subsequent drop has pushed the single currency below the 1.2890 level, which should now provide decent near term resistance", they explain. "While headlines should continue to make for choppy price action the recent bear trend appears well intact, and the next target looks to be near the low 1.28 area."

Meanwhile, UBS analysts keep a neutral short-term bias for the EUR/USD but note that a break below 1.2837 would suggest scope for deeper correction to 1.2758.

In RBS' view, the correction is not over. "Currently the daily chart clearly shows that the EUR/USD daily chart is unwinding from an overbought position as the RSI's beneath the chart show. As a result, expect sell-offs to be more aggressive than rallies and the bias is still heavy until the correction looks to be over," says the RBS team. "When? Well the beginning of the month time cycle has caught some good lows/turning points over the past 6 months and that intersects price action around the 1.27 level. Just before there at 1.2742 lies the 38.2% retracement from the July low to September high."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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