Italy's bond auction failed to impress and rumors of a pending France downgrade as quickly as this afternoon are putting huge downward pressure on the Euro. The EUR/USD slipped to a new low of 1.2625, a 17-month low, giving up the entire rally from yesterday.
Analysts expect the exchange rate to weaken even further next week as European policy makers struggle to restore investor confidence.
Adding salt to the wound, the European Central Bank (ECB) spoke out against the European Union (EU), stating that the most recent outline of the new fiscal compact is a "substantial watering down" of previous proposals that effectively forces the Governing Council to further expand monetary policy.
The EUR/USD is still trading in a downward channel since the end of October. Yesterday's failure to push above the 20-day moving average at $1.2923 opens the euro for another test of the 23.6% Fibonacci retracement from the 2009 high to the 2010 low of around $1.2630.
This is already considered the floor, so a close below that level could send EUR/USD to $1.2500 level and beyond as the landscape in Europe turns increasingly bleak.
Several readers have short positions in the EUR/USD either through shorting the CurrencyShares Euro Trust ( FXE , quote ) or buying PUT options. Just like any sharp move, there is always the risk of a short-term bounce and the EUR/USD is no exception to the rule.
The forex market will be open on Monday with reduced volume with U.S. traders offline for the three-day holiday weekend.
This could give FXE positions a slight disadvantage as the ETF will not be able to track the spot market with the NYSE being closed.
Depending on the trade action form Monday, the FXE to gap up or down, playing havoc on stop orders.
I for one will be exiting my short EUR/USD positions either by price hitting the 30-min Fibonacci downward wave's -1.618 at 1$.2522 or 20 minutes before the close.
I personally do not like carrying forex positions across three-day weekends.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.