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Euro/dollar continues its slow grind lower, falling below another minor support line. The next lines are still far, but are much stronger – at the year’s lows.

This happens as a Greece scrambles to form a temporary caretaker government, ahead of a second round of elections in June – elections that could result in the long awaited Grexit.

The announcement by the Greek president’s office about the failure of coalition talks sent EUR/USD under 1.28 and below support at 1.2818. The pair then approached minor support at 1.2770 and bounced off this line for a while.

This was a dead cat’s bounce – a heavy dead cat. As markets digest the now certain second round of Greek elections, the pair continues its grind lower, breaking the minor 1.2770 line.

EUR USD Under Support Greek Elections May 15 2012
EUR/USD Loses More Support - Click image to enlarge

At 1.2760, the 1.2663 is around 100 pips below. This is still far and the pair might stop to rest before attacking this line. It was an important trough early in the year and will likely prove as strong as 1.30 and not like the recent lines that only provided a temporary relief.

The year-to-date low at 1.2623 is close by, and is also strong support. For more, check out the EUR/USD forecast.

A Greek exit of the euro-zone might be good for Greece in the medium to long term, but will likely rock the euro-zone: French banks are in immediate danger, and the contagion risks are far worse.

The euro could stabilize if there is no contagion.

The most vulnerable country now is Spain – the euro-zone’s fourth largest economy, that has a problematic banking sector.

The Plan C already waiting in the Spanish treasury’s drawers, might be used sooner than later.