EUR/USD Mid-Week Analysis for the Week of December 12, 2011

At the mid-point of the week the Euro is under tremendous selling pressure after piercing the October 4 bottom at 1.3145. Downside momentum is firm and bearish traders now have their eyes set on the low for the year at 1.2873. The steepness of the selling can best be described by the downtrending Gann angle at 1.3127. This angle is dropping at a rate of 0.016 per week from the October 27 top at 1.4247. At this pace the EUR USD should reach the low for the year by next week.

Sellers started hitting the Euro right from the start of the week. The mass exodus from the single currency began after European Union policymakers failed to end concern that Italy and Spain would succumb to a sovereign debt crisis that forced Greece, Ireland and Portugal to seek bailouts.

Last week’s interest rate cut by the European Central Bank also weakened the Euro against other foreign currencies since it took away the interest rate differential edge it had on these countries. Although technical factors suggest the market is oversold, the fact that the last bottom at 1.3145 has been violated means that the main down trend on the weekly chart has been reaffirmed. This doesn’t mean the Euro cannot have a rebound in the form of a short-covering rally, but what it likely suggests is that the single-currency is headed to and perhaps likely to penetrate 1.2873 on its way to a new low for the year over the near-term.

Besides the monetary policy easing, pressure on the Euro is also mounting because of an expected lower growth outlook. Economists are predicting the Euro Zone’s economy will expand 0.5 percent next year. Compared to the U.S. expected growth rate of 2.19 percent, the Euro is definitely at a disadvantage. With growth prospects expected to continue to decline, the ECB will probably be encouraged to continue to slash interest rates all the way to zero just like the U.S. and the U.K. This should keep the pressure on the Euro which could accelerate a decline into 1.20 over the intermediate term.

With perma-hawk Jean-Claude Trichet out of the way, the new ECB President Mario Draghi has no choice but to cut rates in an attempt to create a soft-landing for the economy should it go into a full-blown recession. On December 8 Draghi also offered banks unlimited cash for three years while muffling speculation the ECB will buy more sovereign debt to stem the Euro Zone’s debt crisis. These events started the Euro’s rout late last week.

On Tuesday the U.S. Federal Reserve contributed to a late session sell-off when it pointed out that the turmoil in Europe is a big risk to the U.S. economy. The Fed’s language left open the door to further easing of monetary policy. “Strains in the global financial markets continue to pose significant downside risks to the economic outlook”, the Fed said.

With European financial institutions expected to continue to deleverage themselves from the Euro, traders should continue to look for further downside pressure. Since the Fed did not mention any additional quantitative easing, the U.S. Dollar should continue to appreciate versus the Euro. Of course there is always a possibility of a short-covering rally due to oversold conditions, but overall, the pressure should remain on the EUR USD.

Factors Affecting the Euro this Week:

• Downgrades:  Traders should be bracing for a possible across the board downgrade of Euro Zone nations. This would raise borrowing costs while contributing to a deepening of the region’s debt crisis. France is likely to be the first to be downgraded.

 

• Technical Factors:  Oversold trading conditions may lead to a fast short-covering rally. Traders should be careful selling new lows. This may occur if institutions decide to defend the low for the year at 1.2873.