In late July, the EUR/USD was trading at its low for the year and appeared poised to continue trending lower until European Central Bank President Mario Draghi decided that he would “do whatever it takes” to save the single currency. Later, his decision to allow the ECB to be the lender of last resort calmed the market enough to scare enough of the weaker shorts to trigger a rally back to the psychological 1.30 area.
His strong comments from late July to early September encouraged traders to give him the benefit of the doubt by somewhat assuring the market that the Euro Zone was not going to breakout and that better times were ahead once he could show market participants how his bond purchasing program worked. Unfortunately, his plan has yet to be utilized. However, the Federal Reserve’s fresh quantitative easing plan and the U.S. election kept investors busy enough to keep their eyes off of the Euro.
Consequently, economic conditions in the Euro Zone continued to weaken led my major players such as Spain that appears to have put politics ahead of economic relief. Greece re-emerged as a major headache for the Europeans. Even though its parliament approved the latest austerity package, the expected good news did not bring a guarantee that it would receive its latest tranche of aid.
Investors are now looking at worsening economic conditions and the prospect of ending the year with the possibility of the Euro crisis escalating into 2013.
Although Greece took the first step in fulfilling its requirement to the Euro Zone ministers in order to receive its bailout money that has been held hostage since June, according to Bloomberg, Euro Zone finance ministers may not make a decision to unlock funds for Greece until late November. This uncertainty is not what investors wanted to hear which likely means the downward spiral in the Euro will continue the rest of the month.
Spain in the meantime is watching the events in Greece which may be the reason why it has been hesitant to make a formal request for aid from the ECB. The Spanish government wants to know what positive effect any action by the central bank will have on its economy. According to a statement made on November 6, Spanish Prime Minister Mariano Rajoy needs to know how much the ECB would push down Spain’s borrowing costs before his government applies for aid.
Both Greece and Spain have unemployment rates in excess of 25% and both countries are actively implementing the required austerity measures. In the meantime, tensions are mounting in both countries which leads one to believe that the European crisis is rapidly deteriorating. This certainly does not paint a rosy picture for the Euro Zone economy, leading to the forecast of a lower Euro over the near-term.
Technically, the weekly EUR/USD chart clearly reflects the shift in investor sentiment. The main trend turned down on the weekly chart when the market crossed the last swing bottom at 1.2803. This move also confirmed the double-top formation at 1.3172 and 1.3139.
Based on the range of 1.2042 to 1.3172, the Forex pair is rapidly approaching a key retracement zone at 1.2607 to 1.2474. If the market is going to turn higher then it is likely to occur inside of this zone. Although a technical bounce can be expected in this zone, most likely because of short-term oversold conditions, the fundamental picture suggests that this move is not likely to be sustained and that any attempt to build support in this zone will fail.
Additionally, uptrending Gann angle support which has been guiding the Euro higher against the dollar since late July is also going to be tested at 1.2682 next week. A failure to hold this angle could trigger an acceleration to the downside.
With conditions deteriorating in the Euro Zone and the main trend down on the weekly chart, short traders should continue to pressure the EUR/USD over the near-term. Uncertainty in the Euro Zone coupled with the potential fiscal cliff in the U.S. could wipe out all of the Euro’s gains from July to September.