EUR/USD Gunning for 2014 Lows

EUR/USD Gunning for 2014 Lows

Fundamentals

The 1.35 level is very significant for the EUR/USD. Despite numerous attempts to test this level over the past 8 months, EUR/USD only closed below 1.35 on one occasion and that was on January 31st. If we look back all the way back to September, we see even more instances where the currency pair tested and failed to break 1.35 in a meaningful way. The only time that a sustained break occurred was after the European Central Bank surprised with a 25bp rate cut in November and while the sell-off extended to 1.33, less than 2 weeks later, EUR/USD was trading back above 1.35. So now that we are once again within 30 pips of this key level, many traders are wondering if 1.35 will hold. On a fundamental basis disappointing Eurozone data and a faster decline in European yields drove the sell-off in EUR/USD. The region’s trade surplus rose to 15.3B from 15.2B in May, which was less than expected and yesterday, the Eurozone ZEW survey dropped to its lowest level in 11 months. While Treasury yields declined today, the 1.6bp drop in 10-year yields paled in comparison to the 2.1bp drop in French yields, 2.7bp drop in Italian yields and 5bp decline in Spanish yields. However it is important to recognize that there are also fundamental reasons why the euro refuses to break 1.35. The Eurozone has a massive current account surplus, U.S. yields are still in a downtrend and the currency is benefitting from reserve diversification. Therefore without a significant rally in U.S. yields or a strong signal from the ECB that further easing is imminent a move below 1.35 could be fake-out instead of a breakout. Eventually 1.35 will give way but that may not happen until the fall when the Fed ends Quantitative Easing and shares its exit strategy.

Technicals

From a technical perspective, 1.35 is less significant than the February 3rd low of 1.3477. However taking a look at the chart, today’s decline has taken EUR/USD below trend line support. If the pair breaks its 2014 low of 1.3477, the next stop could be the November low of 1.3295. However if it holds 1.3450 (we’ll give it a bit of flexibility), it could be back into the 1.35 to 1.37 range for the pair.

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