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Trading

14 May 2010

FX Update: EURUSD tests below 1.2500 - how low can we go?

John J. Hardy, FX Consultant, Saxo Bank

FX Update: EURUSD tests below 1.2500 - how low can we go?

EURUSD dipped to yet another low for the cycle and below the psychologically significant 1.2500 level in the early US session. The latest noise on the EuroZone revolves around the prospects and risks of a breakup, with former Fed chairman Volcker weighing in on the issue and a Spanish newspaper reporting that Sarkozy threatened to leave the Euro during negotiations with Merkel ahead of the announcement of the bailout package. Spreads widened on Greek debt today by the most since the announcement of the bailout package.

Though all of the news flow remains very Euro bearish, we are beginning to wonder at this point whether the market has pushed about as far as it can push in the near term on the bearish Euro story as bearish sentiment on the Euro is off the charts. Where will the market find new sellers of the currency now that a stabilization package has taken the EuroZone meltdown story off the front burner and put it off for another day? Certainly the multi-year lows at 1.2330 are the next key test. If this area isn't able to hold the pair, then the parabolic price action might take us all the way down to 1.2000 or even lower - as a lack of bids in the market could see a climactic sell-off before we find a significant bounce. Once price action goes into a parabolic decline, the market finds a bottom quickly, though sometimes at levels very far from where they started.