EUR/USD to Break 1.22?

EUR/USD to Break 1.22?

Fundamentals

Despite the rebound on Friday, EUR/USD is trading near 2 year lows and question of whether or not the currency pair is destined to break 1.2247 and head below 1.22 hinges in large part on next week’s event risks. In Europe, the PMIs, IFO and ZEW surveys are scheduled for release and while economists anticipate mild improvements in most of these reports, the ECB’s concern about the overall welfare of the Eurozone means the greater risk is to the downside. If any of these reports disappoint it would reinforce the need for Quantitative Easing and remind investors that euro should be trading lower. At the same time, the Federal Reserve who meets next week will most likely remove the “considerable time” period language from the FOMC statement, paving the way for a rate hike in 2015. This reminder of EZ – US monetary policy divergence should drive EUR/USD to fresh multi-year lows and trigger a break of 1.22.

Technicals

The recent rebound in EUR/USD has taken the currency pair to the top of its month long range. 1.25 is near term resistance with 1.26 being the key level to watch. We do not expect EUR/USD to trade above 1.26. On the downside, a break of the former low of 1.2247 puts the currency on target for a move down to the 50% Fibonacci retracement of the 2000 to 2007 rally near 1.2145.

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