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Euro dollar fell to a 4 month low, currently clinging to  losing low support (update: gone as well), and it seems that nothing can stop the pair. A default in Greece, selective or not, is now on the cards. Italian bank shares continue their drop and Italian and Spanish bond yields are at record highs. The pair is now approaching low support. Where will it stop?

Here’s a quick update on technicals, fundamentals and what’s going on in the markets.

EUR/USD Technicals

  • Asian session: After a slow start, the session warmed up and saw the pair break below 1.3950. The free fall continues now..
  • Current range 1.3860 to 1.3950. 1.3750 to 1.3860.EUR USD Chart July 12 2011
  • Further levels in both directions: Below  1.3860, 1.3750, 1.37, 1.3570, 1.3440.
  • Above:  1.3950, 1.4030, 1.4070 1.4160, 1.4220, 1.4282, 1.4375
  • Serious support is only at 1.3750, with the most critical line awaiting at 1.3440.
  • On the upside, a rise above 1.3950 is critical for a recovery.

Euro/Dollar continues the free fall  – click on the graph to enlarge.

EUR/USD Fundamentals

  • 12:30 US  Trade Balance. Exp. -44 billion.
  • 14:00 US  IBD/TIPP Economic Optimism. Exp. 45.7 points.
  • 18:00 US FOMC Meeting Minutes.

For more events later in the week, see the Euro to dollar forecast

EUR/USD Sentiment

  • Imminent default: This is less of a speculation any more. The Dutch finance minister leads the way once again with statements of an upcoming “selective default”. Apart from Jan Kees de Jager, also George Soros says it may be inevitable. This was partially priced in. It is “sell by the rumor, continue selling by more rumors” at the moment.
  • Italian trouble: After the huge sell off of Italian bank stocks and government bonds on Friday and Monday, Tuesday sees another sell off, and another suspension of trade in Italian bank Unicredit. Italian regulators tried to ban “naked shorts” but the situation continues deteriorating. Italian bond yields jumped again to 5.95% at the time of writing.
  • Italy and Spain downgrades next?: Many of Spain’s saving banks, cajas, are expected to fail the stress tests. Even without these tests, it is known that the banks are in trouble. Spain isn’t immune to the crisis. 10 year bond yields are at new records of 6.3%. Italy and Spain could get downgrades from rating agencies. Portugal got a downgrade on the fears of a Greek default. This could spread quickly to both countries.
  • Portugal downgrades economic outlook: Sharply.Economic contraction is now expected at 2% for 2011, lower than 1.4% estimated earlier.
  • Horrible Non-Farm Payrolls: The situation isn’t much better on the other side of the Atlantic. The US economy hardly gained any jobs in the past two months. This pushed the dollar lower only against certain currencies.
  • Trichet firm on rates, defends Portugal: The ECB raised the interest rate to 1.50% as expected, and kept up the hawkish tone regarding inflation. Trichet also provided support for Portugal, in the wake of the severe downgrade from Moody’s.The rate hike is widely criticizes. It just  exacerbates the debt crisis.