EUR/USD Technicals – 1.30 breached, downside galore

EUR/USD has finally broken 1.30 after coming close on 3 separate occasion last week. Scanning through the economic docket yesterday, it is easy to point at the only major European news – EZ Producer Price Index which came in at -0.3% M/M and -0.1% Y/Y, both lower than expected and proclaim “ah ha!” that is the reason EUR traded lower. However the truth could not be further than that. EUR/USD started trading lower on the get go when European session started, with price falling from just under 1.308 to 1.302 within the 1st 2 hours of trade, before the accused EZ Producer Price Index numbers were released. In fact, EUR/USD actually rebounded slightly higher on the 1.302 Channel Bottom and support confluence when the numbers were released, showing the limited impact the supposed bad news has on EUR.

Looking across the market, it seems that yesterday’s sell-off in EUR is more attributable to the risk-off sentiment of the Euro-Zone, which saw European bourses trading lower – DAX closed at -0.92%. Stoxx50 at -0.74% with FTSE doing slightly better at 0.06% thanks to a post UK noon rally. The reason for the sell-off is not immediately clear, but the smoking gun appears to be more political than economic, with markets getting concerned about the unrest Portugal when reports of Greece being given 3 days ultimatum from Troika to show aid-worthiness by making good of the estimated shortfall standing around 3-4 billion EUR. This decline got exacerbated during US trading session which saw US stocks continuing the downtrend from Europe, pushing USD stronger and dragging EUR/USD deeper into the mud. Both factors contributed greatly to the break of 1.30, with price closing closer to 1.298 towards the end of US session.

Hourly Chart

From a technical perspective, current price is still within the newly formed Channel that typifies the recent sell-off. The recovery seen during the last few hours of US session which failed to clear 1.298 resistance is a sign that Bearish pressure continue to remain strong. Currently we are trading close to the top of the Channel, which will open up Channel Bottom as possible bearish target should Channel Top resistance hold. Looking at Stochastic, readings are deeply Oversold, but readings seems to be forming an interim peak within the Oversold region with the recent 1.298 test attempt. With both Stoch/Signal line both pointing lower, there is a possibility of readings continuing to move deeper within Oversold region which does not jeopardize downside scenarios described previously.

Weekly Chart

The break of 1.30 is huge on the Weekly Chart, as the break of the interim support allows bears to now target the rising neckline, moving one step closer for the formation of the Head and Shoulders pattern. Should price hit or perhaps even break the neckline this week, we could see acceleration towards lower grounds quickly with a 3 Black Crows bearish reversal pattern forming on top of the H&S mentioned earlier. Couple this with the bearish Stochastic signal, we are potentially looking at a longer-term move towards 1.20 or perhaps lower for a bearish extension of May 2012 decline.

More Links:
GBP/USD – Pound Drops after Lukewarm UK Construction PMI
USD/CAD – Greenback Rises as US Manufacturing Data Improves
AUD/USD – Aussie Lower After RBA Rate Announcement

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