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Euro Drops Through 1.3500 Before Rebounding

Last updated 11/10/2011 3:35 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD dropped through the key 1.3500 level in late Asian trade before staging a bounce as concerns about Italy continued to weigh on the unit. The single currency saw  a wave of selling that knocked out the key psychological barrier just before the start of European session before rebounding sharply on short covering and news that Silvio Berlusconi will resign by Sunday.

Markets remain on edge as Europe’s third largest economy faces a credit crisis that threatens the very fiber of the monetary union. Italian yields remain near the 7% mark as the spread between BTPs and German bunds continues to trade at highest level in euro era. As we noted yesterday, “Unless ECB provides some aggressive support to the market the shorts will continue to press their trades and that dynamic will weigh on the EUR/USD. The events in Rome were strictly political in nature and will not produce the immediate economic reforms that the market seeks. At best such policy moves will  take several months to establish. Therefore the ECB must act as a stabilizing force before the Italian credit problem becomes unmanageable.”

Meanwhile economic data from Europe   continued to disappoint with French Industrial Production  sinking by -1.7% in September from August as significant drop in construction, electronic equipment and energy production all contributed to  the worst contraction in demand in more than 2 years. The news only confirmed the ongoing economic slowdown in the region which make it that much more challenging for EZ  officials to  deal with the spreading credit crisis.

With little economic news on the docket the trade in the EUR/USD  will likely be dominated by ongoing flows in credit market as the pair tries to stabilize at the 1.3500 level for the rest of European trade.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.