The worst performing currency today was the euro, which dropped well below 1.20. The single currency had been under pressure throughout the NY trading session and ended the day near its lows. This suggests that we could see a deeper slide down to 1.19. The sell-off was driven by the recovery in the U.S. dollar and the slide in German yields. Data was mixed with the decline in German factory orders offset by a pick in Eurozone retail sales and confidence. These reports tell us that while the recent improvements in the economy have boosted confidence, the momentum is beginning to slow as the gains in the euro pose a risk to growth. Looking ahead, we anticipate additional near term losses for the euro and the scope of the move will hinge on tomorrow’s German industrial production and trade balance reports. Economists are looking for stronger numbers all around given the improvement in the manufacturing PMI index but the drop in factory orders raises the risk of a downside surprise.

Technically, EUR/USD has fallen below the first standard deviation Bollinger Band. This puts the pair on course to test the 20-day SMA at 1.1885 but the round number (1.19) should be natural support.

EUR/USD Back to 1.19?

The euro on the other hand bounced off its lows of 1.1817 to end the day in positive territory. The latest economic reports were mixed with German consumer prices rising in November, Eurozone business confidence ticking upwards but industrial and services confidence fell short of expectations. Even so, all of these represented improvements in the Eurozone economy. The latest comments from ECB officials were also relatively positive with Bundesbank President Weidmann saying the central bank’s growth outlook could be raised given strong data. He also expressed his skepticism over the need for QE. Vice President Constancio felt that the euro area is much more resilient to possible shocks. German retail sales and labor market numbers are due for release on Thursday. Given the sharp rise in the employment component of the PMIs, we believe tomorrow’s report will show a material improvement in labor market conditions. If we are right, EUR/USD could squeeze up to 1.19.

Technically, the EUR/USD has found support above the 100 and 50-day SMA. It is too early to tell whether 1.1817 marks a bottom because there’s still scope for a move back to 1.1750/60 but if EZ data is good, we could see a rally above 1.19