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Euro Drops Below 1.2500 - Where is the Bottom?

Last updated 3/4/2009 2:22 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 1.2500 barrier in early Asian trade after weaker than expected Australian GDP numbers triggered a dollar rally taking out stops at the key psychological level.  The 1.2500 barrier was heavily defended by option sellers over the past few days, but once the level broke EUR/USD quickly tumbled to 1.2457 before yet more option related defensive buying ahead of the  1.2450 strike propped up the pair.

As we wrote on Monday, “Once the 10 AM New York option cut passes, it will be interesting to see if the EUR/USD tries to target the 1.2500 handle again. The pair has managed to hold support at that level twice but it still remains a magnet for euro shorts looking to run stops at that barrier.  We continue to believe that unless EZ officials begin to make quick progress on the issue the deteriorating economic conditions in Eastern Europe threaten to explode into a full blown financial catastrophe.  With the pair so tantalizingly close to the 1.2500 barrier it appears to only a matter of time before that key support level gives way.”

Although the move in the currency market tonight was much more technical rather than fundamental in nature the underlying economic problems continue to weigh on the single currency. Tonight’s final  EZ PMI data is likely to show further deterioration in manufacturing and service sectors while the labor markets across the region continue to convulse. Spanish unemployment has risen to a 13 year high as 3.5 million workers  now find themselves out of a job while German companies are about to put another 1.5 million workers on shortened hours.

The fall of in wage income will no doubt further exacerbate the economic contraction in the European Union and so far any attempts at stimulus by the region’s fiscal authorities have been fragmented and ineffective. The EUR/USD now finds itself near the spike lows set last October and November and 1.2333 will serve as the key support level over the next several sessions. For the time being the flow in FX remains firmly in the hands of dollar bulls, but the pair is now approaching oversold levels  and could quickly shoot up on any renewed market concerns regarding  the US financing issues. In short, the trade remains to the downside, but caution is the order of the day.  

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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.