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A lot of cold water has been spilled on the high hopes for a quick and comprehensive solution for the European debt crisis. With less expectations from the upcoming summit and from a Chinese rescue, EUR/USD loses the critical resistance line it struggled to conquer.  

What’s next? Update.

Promises

When Merkel and Sarkozy promised to provide a Grand Plan last week, the sun was shining. Euro/dollar climbed around 500 pips and most. The biggest achievement came at the end of the week when the pair managed to cross the critical 1.3838 line that capped it very nicely.

In the G-20 meetings over the weekend, pressure was rising on Europe to act, and there were hopes that the Grand Plan would be presented towards the European summit on October 23rd, and before the G-20 summit at the beginning of November, when a Greek default could be announced.

The plan?

The plan reportedly included leveraging the EFSF to have between 2 to 3 trillion euros, using around €200 for the banks and the rest to safeguard sovereigns after Greece would be allowed a haircut of 50%.

Such a haircut would make its debt sustainable but would require safeguarding against the next default (Portugal?) and the banks.

Reality

The wake of the new week brings a lot of cold water: German officials are playing down the hopes for the upcoming summit and even say that the crisis will last deep into 2012. Germany’s chancellor, Angela Merkel, called these hopes “dreams”.

In addition, the Chinese made yet another diplomatic gesture by promising to help, but they have their own conditions. If they’ll help, it will probably be limited and late.

So, EUR/USD fell under the major 1.3838 line and also under the round number of 1.38. Further support is at 1.37, which is not only a round number but also served as strong resistance last week (and also beforehand). It is now significant support.

What’s next?

Up to the next summit over the next weekend, we have yet another vote in the Greek parliament over the latest austerity measures. Members in the ruling party are quite reluctant to vote for it. As a preparation for the vote, lawmakers will receive a two-day general strike, beginning on Wednesday.

Rough times for the euro.

For more on the common currency, see the euro/dollar forecast.

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