It finally happened: EUR/USD cracked below the 1.35 level that Mario Draghi sent it to. The pair was hovering above this line and it made a move below. The new low so far is 1.3490 – the lowest since February.
The euro was pushed down due to several reasons:
Update: US consumer sentiment disappoints with 81.3 points in July – USD slides – And EUR/USD is back to 1.3517.
- Weak European indicators: German ZEW came out below expectations, and so did the current account. And while inflation did not disappoint, at 0.5% it remains at rock bottom levels.
- Portugal: With a major shareholder in Portugal suffering issues, there are worries that the whole banking system in Europe remains fragile.
- Change in euro-zone flows. With the ECB’s OMT backstop, peripheral bonds seemed very attractive, with their high yields. But after all the inflows, these bonds are already less attractive and flows may have changed. This is a slow process, but it is probably beginning to take effect.
- A slight hawkish tilt by the Fed: While Janet Yellen made her best effort not to say anything, the warning about some “stretched valuations” in some stock market sectors could be seen as a warning that not only is QE ending, but rate hikes may be coming sooner than later.
- Geo-political worries: The world is unstable. The downing of the Malysian plane in Ukraine can have dangerous implications, especially as it was a plane leaving Amsterdam, in the heart of the EU. Russian gas supplies to the old continent may be in danger. Adding the ground offensive Israel launched into Gaza, the “risk off” sentiment does not help.
- Italy GDP forecast downgraded: Ryan Littlestone at Forex Live reports that the Bank of Italy has downgraded its 2014 GDP forecast from a not so impressive 0.7% to an even worse 0.2%.
Further support awaits at 1.3475, followed by 1.3450.
Resistance awaits back at 1.35, and this line could be fought over. Further resistance awaits at 1.3550. More levels are in the EURUSD forecast.
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