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EUR/USD continues to slide lower. The new 2 year low now brings it closer to a critical support line. Will it bounce here? Or make an even bigger break?

Spain’s extreme austerity measures leave Spanish bonds unimpressed, and the markets are digesting the not-too-dovish FOMC meeting minutes.

EUR/USD broke below the minor support line (And round number) of 1.22. There are no more lines before critical support at 1.2150. 1.2150 was a clear separator of ranges when the markets collapsed in May 2010 – when Greece received its first bailout.

The chart below shows how nicely this line worked as support for long days, and when it was broken, the line switched to support, and then back to resistance once again. There was no criss-crossing – it was a clear separator, and more important than the round 1.20 line.

EUR USD Close to Critical Support Weekly Chart July 12 2012
EUR USD Close to Critical Support – Click image to enlarge

The most recent catalyst for the fall came from the US for a change: meeting minutes from the recent FOMC meeting showed that the Federal Reserve is not keen enough on QE3. There are only a “few” members (aka 2) that support more dollar printing. The rest are in a wait and see mode.

In Europe, another tentative announcement came: Spain would receive 30 billion euros for its banks quite soon. While the bailout is officially only for the banks, the sovereign pays, and pays dearly: Spain’s PM announced a 65 billion euros package.

The package includes a raise of VAT from 18% to 21%,  a cut in unemployment benefits and a cancellation of a Christmas bonus for public workers. No Santa Claus anymore.

Also the possible delay in launching the permanent bailout fund – ESM, is weighing on the euro. Germany’s constitutional court is taking its time in approving this mechanism.

For more, see the euro to dollar forecast.