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.