Its been 8 days since the euro has rallied against the U.S.
dollar. To put this into perspective, it is the longest stretch of
weakness since October 2008, when we were knee deep in the global
financial crisis. Comparatively however it is not the perfect
analogy because the losses this month are small compared to the
losses in 2008. In the 10 day period between Sept 23 and Oct 6,
2008, the EUR/USD fell from 1.4827 down to 1.3440. At the start of
this month, the EUR/USD was touched a high of 1.3284 and earlier
today dropped to a low of 1.2930. Although the political mess in
Greece could end with the historic decision to leave the euro, such
a decision should not yield as large of a move in the EUR/USD as
the global financial crisis because the investors have had plenty
of time to discount the move and have already set their contingency
plans into motion.
A number of stops were triggered when the EUR/USD broke below
1.2955 and this break is technically significant. The latest move
takes the currency pair below the 61.8% Fibonacci retracement of
this year's rally. If the EUR/USD closes below this level, it would
open the door for a move down to at least 1.2840, a former
resistance turned support level from mid January. This may hold the
pair temporarily but the real support level is at 1.2624, the YTD
low. On the weekly charts, we can see a head and shoulders
formation that also points to the possibility of a move back down
to yearly lows.
Fundamentally, there are plenty of reasons why the EUR/USD could
revisit its year to date lows. As we wrote in our daily note last
evening, the chance of Tsipras succeeding in forming a coalition
government is slim. Elections will most likely be held on June 17th
and between now and then there will be a virtual moratorium on the
implementation of austerity measures. Tsipras affirmed that Greece
should remain in the euro but it would be ludicrous to expect the
European Union to allow the country to remain in the euro and have
access to the ECB if their bailout accord becomes "null and void."
In the meantime however as we watch the Greek political saga
unfold, all eyes are on European bond yields. For the first time
since May, Spanish 10 year bond spreads are above 6 percent and if
Spanish yields continue to rise, the EUR/USD will continue to
slide.
With no major U.S. economic data on the calendar today, the
focus will remain on Europe.