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EUR/USD is now falling under the 1.28 line and trading at the lowest levels since September 11th. It hit a low of 1.2802, just under the 1.2805 trough seen on September 12th.

EUR USD 8 Week Low November 5 2012
EUR USD 8 Week Low – Click image to enlarge

Merkel’s statement about taking the crisis 5 more years wasn’t that encouraging. Yields on 2 year German bills fell below 0% for the first time since September, a very worrying sign.

An article published in Die Welt over the weekend also added fuel to the fire: it said that the ECB is checking the quality of Spanish collateral. If the collateral isn’t of high quality, the ECB could demand to replace 16.6 billion euros worth of bonds, at a time when Spanish banks are struggling.

Update: the pair recorded a low of 1.2780 before stabilizing, at least for now.

On Friday, the release of the positive Non-Farm Payrolls sent the dollar higher and sent EUR/USD towards the lower part of the range.

The reaction to the Non-Farm Payrolls also included a slide of the stock market and drops in commodities, a class “risk off” reaction to an event that is usually “risk on”. This implies that the markets might already be pricing in a victory for Obama.

Another factor is Greece of course: the government is making a last moment drive to pass new austerity measures, as it faces running out of money soon. However, the new measures could be unconstitutional.

The Greek coalition isn’t strong – Democratic Left does not support the labor reforms, and also PASOK is making signs of dissatisfaction. PM Samaras has to work hard in order to get support.

Bad news also came from Spain, where registered unemployed people rose by 128.2K, more than 90.3K that was expected.

The next line of support is 1.2750, followed by 1.2670. Resistance is at 1.28, followed by 1.2880. For more on the pair, see the EUR/USD forecast.