EURUSD: is 1.2790 on the cards?

The EUR sell-off has slowed down throughout the London session on Tuesday, however this pair is still looking weak. The high of the day has been 1.2895, suggesting that there is some hefty selling pressure at 1.2900. EURUSD has not been able to stage a decent recovery since Thursday’s post-ECB sell-off, and has closed below 1.3038 – the 50% retracement of the July 2012 – May 2014 uptrend, for three consecutive days. We expect further downside for this pair, with 1.2787 – the 61.8% retracement of the 2012 – 2014 bull trend, the next key level of support.

The fundamental back-drop is also weak for the EUR right now:

• The interest rate differential between Germany and the US is still deeply negative, as the ECB starts to cut interest rates and the Fed considers the timing of rate hikes.

• A letter from the Federal Reserve Bank of San Francisco released earlier found that the market is not pricing in the prospect of Fed rate hikes, and is more dovish than the Fed’s own policy forecasts. This has led to a wave of re-pricing the timing of a US rate hike, which has boosted the greenback.

• Not even Scottish referendum panic can stem the EUR’s sell-off. EURGBP managed to claw back some losses on the back of the sharp decline in the pound on Monday. However, a yes vote may also be bad news for Europe, as it could lead to a UK referendum on EU membership in 2017 and potentially the break-up of the EU; hence gains in EURGBP have been capped.

With both the fundamental and technical pictures looking bleak, we see EURUSD continuing to fall until 1, we signs of an economic pick-up in the currency bloc, or 2, there is an end to the ECB’s loosening cycle. Thus, EURUSD could arrive at 1.2790 sooner than you think, and any short-term relief in this beleaguered pair could be sold into.