EURUSD: Looking for a daily close below 1.3477

After a summer stuck in a stubborn range, the EUR has started to come under pressure and could be about to embark on a leg lower. The single currency is one of the weakest performers against the greenback in the G10 today. The low so far on Tuesday is 1.3478 – one point above the lowest level since February 3rd at 1.3477. 1.3477 could be a sticky level; however, a daily close below this level could leave the EUR vulnerable to further losses.

So what is weighing on the EUR?

The exact cause of the EUR decline is hard to pin down, but there are a couple of things that could limit a potential recovery:

• EU foreign ministers meeting on Russia. The prospect of sanctions could hurt the Eurozone’s fragile economic recovery.

• Eurozone debt data for Q1 found that Portugal’s debt level rose in Q1 along with the overall Eurozone. With Banco Espirito Santos’ troubles still lingering in the background, Portuguese economic woes may start to re-surface. Portugal’s bond yields are slightly higher today.

• US Inflation data – the market is expecting 2.1% for June’s headline CPI, which is above the Fed’s 2% target rate. A stronger inflation reading could boost the dollar, as it puts pressure on the Fed to bring forward the prospect of a rate hike.

The most potent reason for the EUR’s decline, in our view, is the dollar. The dollar index has had a strong push higher this morning, and has broken above prior highs at 80.70, which opens the door to a re-test of 81.02, the June 5th high. A break above here could see back to 81.48 – the Nov 2013 extreme.

Once bitten…

The single currency has threatened to move lower before, only for it to bounce back, so why should we believe that this is the real deal? Our answer to that is that we shouldn’t. In the short term, we would look for a daily close below 1.3477 before we get excited about a potential downtrend. At that point we would still tread carefully and target two key support levels, the first at 1.3426 – the 200-week moving average, if EURUSD is still declining at this stage we would look for a move back to 1.3296 – the November 2013 low.

We have a glimmer of confidence that decline could be the real deal after the break of 1.3525, which was the first suggestion that the 2-year uptrend in EURUSD could be coming to an end.

Takeaway:

• The EUR is looking vulnerable on Tuesday and could be on the cusp of a downtrend.

• The break of 1.3525 – trend line support, was a bearish development.

• Whether or not we get a daily close below 1.3477 could depend on the US inflation data due at 1330 BST/ 0830 ET on Tuesday.

• In the past, the EUR has failed to follow through after a break lower, so we urge caution. Below 1.3477 we are looking at two key support levels including 1.3426 and 1.3296.

• Short term resistance is 1.3525.