EURO Back to 1.10?

EURO Back to 1.10?

What’s bad for the European Union is also bad for the euro because if the EU can lose its most important member, the Eurozone could start losing its weakest links. This strong sense of nationalism could spillover to other countries especially those that are struggling with euroskeptics and political fragmentation. In the long run, Brexit makes the Eurozone a more attractive destination for investments but in the near term, the uncertainty has caused Eurozone peripheral bond yields to spike, bank shares to plunge, credit default swaps to widen and the euro to weaken. Right wing euroskeptics in the southern half of the Eurozone have already begun to call for their governments to hold their own referendums and if the European Union unravels, so could the Eurozone. Spain has a general election this weekend and this is the first test for the euro. If Podemos, the antiausterity group emerges as the second largest party, it would raise concerns about support for the euro and European integration. Two other forces also hang over the currency, which are risk aversion and possible ECB easing. In the not so distant past, ECB President Mario Draghi said they stand ready to do “whatever it takes” to maintain financial and price stability. While the FTSE100 dropped only 3.15%, the DAX fell 6.8% and the CAC fell 8.04%. If peripheral bond yields rise further or equities experience steeper losses, the ECB could step in with more stimulus which would be negative for the euro.

Technically, now that EUR/USD has broken below the 61.8% Fib retracement of 2000 to 2008 rally, we should be headed back down to support at 1.1000. On the daily charts, the 200-day SMA at 1.1100 provides short term support but this level was cleared in Friday’s session. 1.1215, the 61.8% Fib is resistance and a great level to sell into.

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