The EUR/USD pair fell again on Wednesday as various negative issues surround the common currency at the moment. The market heard that the ECB has discontinued monetary operations with some Greek banks as they don’t have the proper recapitalization isn’t in place. This is a very negative turn of events, and the likelihood of a Greek default is rapidly increasing. In all reality, this shouldn’t be a major surprise to the markets, as simple common sense should have let them in on this secret. For a bit of trivia, we have this question for you – Which country has defaulted on its debts the most in the last 120 years? That’s right – Greece. Defaulting on debt is what Greece does. None of this is exactly groundbreaking stuff.
The real fear now is that the risk of contagion has grown. The defaulting by the Greeks will set off a chain reaction that honestly has no real end game that we can see. Who knows where that kind of mess stops? The truth is that a lot of banks will no longer trust their counterparties if this keeps up, and that will lead to a massive credit crunch again. None of this is set in stone yet, but the odds are increasing each day this goes on.
Bond yields are rising in several countries still, and Europe simply feels like a time bomb at the moment. The bond markets can often lead the way, and they are saying that the Spanish, Italians, Greeks, Irish, and Portuguese aren’t as trustworthy as they once were thought to be. The yields in these countries are still very high, and as long as this is the case, the debt markets will be considered to be “distressed.”
The markets in general are running into the US dollar, and this pair is the epicenter of that move. This is why the fall has been so exaggerated lately – people are running as fast as they can to America and away from Europe specifically. The Dollar has gained in general, but this is where a lot of the focus is. Many traders are running into the US Treasury markets, and this of course drives demand for more Dollars which in turn will drive the value of the Greenback up against almost all currencies.
The descending triangle that we had been in for so long still signals a large move down on this chart. The implied measurement has this market aiming for 1.25, but there should be some kind of support right around the 1.26 level as it was the site of the last major bounce. With this in mind, we are already short and will continue to stay that way until we get to 1.26 at least. Adding to our short position on rallies is our plan, and as long as we are below the all-important 1.30 level, we simply will not buy this pair. If do get that level broken on a daily close however, the move would signal a momentum shift and force us to buy.
Written by FX Empire