Euro Breaks Down on Imminent Double Dip Recession

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EUR/USD began a fresh downfall, losing the previous support line and heading down. The market begins digesting the meaning of the austerity programs that flood the continent – a good chance of double dip recession brings the currency down – the high unemployment rate increases the chances of this. Update on the next milestones.

The debt issues have a price – money doesn’t grow on trees. No country is immune to the contagious debt diseases. Spain didn’t exit the recession anyway. Last week, the Spanish parliament hardly passed a harsh austerity program. This was a victory for the government and a relief for investors – the government is in control and the deficit is taken care of. Well, not exactly:

But this has a price – with less government spending, the chances of Spain returning to sustainable growth are slim. Spain is the fourth largest economy in the Euro zone.

Also Greece and Portugal suffer from heavy debt issues. You may say that these are isolated cases and that the stronger countries will grow and pull the zone out of its troubles.

Well, also the strong countries, Germany and France, which are the locomotives of the Euro-zone and also the Euro, are dealing with severe budget cuts. If Germany and France don’t grow – nobody grows. Europe already suffers from a very minimal rate of growth. A return to economic contraction will probably be seen in Q2 of 2010 and further on – a double dip recession.

Germany is currently strong, with another drop in the number of unemployed people – 45,000, much more than the early expectations of 18,000. This follows a surprise last month (67,000). But as aforementioned, Germany cannot carry the Euro-zone all by itself.

The all-European unemployment rate edged up to 10.1%. While this was expected by economists, the high rate is big burden on the Euro as well. Despite economic growth, the unemployment rate continues to be high. With another recession – it can climb even higher.

The Euro pays the price

Euro/Dollar broke below 1.2142 and already reached 1.2120. The move continues. The next barrier for the pair is the round number of 1.20. This wasn’t a technical line of support or resistance in the past – only a psychological number that was quoted lots of times in the news. There’s more room to drop:

The next line of support is already a stronger one – 1.1820 – this was a strong line of support about 4 years ago. The ultimate line of support is at 1.1630 – the lowest level for the common currency since 2003. The Euro will probably stall before breaking down below this line.

If the pair recovers, the next levels of resistance are 1.2331, the “Lehman levels” (2008 lows) and then 1.2460 – which was a technical barrier last week.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

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