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After falling to as low as 1.2880 overnight, the EUR has bounced back a bit, currently trading in the 1.2940-50 range after an announcement during early European trading that Cyprus will put a new proposal on the table today, that will see smaller depositors with savings less than EUR 100,000 taxed at a lower rate than those will greater EUR holdings. This move is aimed at easing the pain of the bailout agreement that will impose a tax on depositors. This news was first reported by DOW JONES.

The EUR as well as equity markets in Asia and Europe opened lower as traders got a chance to deal for the first time after the Cyprus deal was announced on Saturday.

The overall move on the EUR saw the currency move from a closing level of around 1.3060 on Friday afternoon to the 1.2880 low overnight. Markets are concerned that taxing depositors will set a dangerous precedent for the Eurozone and that this could cause “runs” on regional banks. This move will also move depositors to seek “safer-haven” banks in less debt effected countries within and outside the Eurozone. Most analysts are expecting depositors to close their accounts at Cypriot banks when they reopen on Tuesday. Monday is a banking holiday. No depositor will continue to keep money in a banking system that just claimed 10% of their funds without any notice.

Given the actions in Cyprus over the weekend, that were proposed by the EU Council and agreed to by Cypriot leaders, how confident can you be if you are a bank depositor in Portugal, Spain or Italy? Isn’t it possible, given “your” problems, that you may be next? Wouldn’t you consider moving your EUR deposits to a less debt ridden country like Germany?

Technically the major support level of 1.2870 has come into play as a breach there should see a renewal of selling as the downside target would then be 1.2680. The resistance level at the present time is Friday’s high of 1.3110.

As we have seen before, there are never “one-way” only moves, so this reversal from 1.2880 to the mid 1.29’s is not surprising. Regardless of the outcome in Cyprus today, the Eurozone financial crisis is back front and center in traders minds. And when there is a financial crisis around the world, currency traders always return to the USD as a safe haven. That is what has happened overnight.

This is a story that is ongoing and I am sure there will be updates during the trading day. One interesting thing to watch this morning will be the reaction of the DOW to this overnight news. DOW Futures indicate a lower opening. After 10 straight days moving higher, the DOW closed slightly lower on Friday. Will this news out of Cyprus “spook” investors in the US and move the DOW lower this morning? And if we see a sell off, will it be greater than anticipated? Overnight, we have seen traders move away from “risk”. I have a feeling, this scenario may follow through this morning.

Further reading: EURUSD forecast.

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