Key Levels in EURO

Key Levels in EURO

Key Levels in EURO

Global equities sold off hard today with Europe leading the losses. The German DAX was down 3.3% while the Spanish IBEX fell 4.4%. Major losses were also seen in U.S. stocks with the S&P 500 falling more than 2%. While there was no specific catalyst for today’s moves, the bond markets tell an interesting story. According to the sharp rise in European peripheral yields and steep decline in Treasury rates, investors are extremely worried about the effectiveness of central bank policies. Ten year Treasury yields fell approximately 8bp while Spanish and Italian yields rose more than 10bp. But the big moves were in Portuguese and Greek yields which jumped 25bp and 61bp respectively. Greek stocks also dropped to their lowest level since 1990 on reports that the Greece bailout review stalled. This is the 5th year in a row that Greece is in the headlines and today’s focus on the debt-laden nation serves as a harsh reminder of Europe’s credit problems. If Greece fails to secure additional funding, investors can expect another round of headaches for the euro. Voter fatigue is becoming a serious problem and there may not be enough political will to provide additional support to Greece. In the near term however, we don’t think the ECB will be pleased with the spike in peripheral yields and the more than 5-cent rise in EUR/USD since their easing in December. The euro is only rallying because it is a deeply sold funding currency and we think it won’t be long before we hear renewed concerns from the central bank and talk of more easing.

After breaking out of a 7+ week long consolidation below 1.1050, EUR/USD has largely held onto its gains. However 1.1260, the 61.8% Fibonacci retracement of the October to December decline is a very important level that technical traders respected last week and we think it should hold. If it does, a move back to the 200-day SMA at 1.1050 is likely. If it doesn’t the next level o resistance is right above 1.1300.

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