EUR/USD bounces off key support, but further losses could be on the way

The EUR/USD has started the new trading week on the front foot. Though there are a few data releases this week that may provide some direction for the world’s most heavily-traded FX pair, the main risk event will be the voting in the Greek Presidential election on 29th December. Should the government’s candidate for president is rejected then a general election will be called for early next year. This could be a particularly bad outcome for the euro given that the left-wing anti-austerity Syriza party is currently leading in the polls. The single currency could easily drop below 1.20 against the dollar in early 2015.

But in the more near term outlook, the EUR/USD could be in for a small bounce, particularly if this week’s US economic data disappoints expectations. Existing home sales data will be the main event today; this is expected to have fallen 1 per cent in November to 5.21 million annualised units from 5.26 million in October. On Tuesday, we will have the latest new home sales figures, along with the final reading of the quarterly GDP estimate, revised UoM consumer sentiment, core PCE price index and personal income and spending numbers. In contrast, there are not many economic data releases scheduled from the Eurozone, so the EUR/USD pair may well be driven primarily by the USD over the next couple of days.

The lack of top tier economic data may however encourage traders to focus more on the technical side of things. In this regard, speculators will be watching the 1.2220 level with keen interest. This is where a long-term bullish trend line (which is derived from connecting the low point of 2010 with that of 2012, and extending the line to the future) comes in to play. Interestingly, price has already bounced off of this level overnight, which suggests that traders are indeed paying some attention to this level. Nevertheless, the path of least resistance is to the downside and so there is a good chance the EUR/USD may head further lower still – especially after it formed a large outside candle last week, which is clearly a bearish sign. If the 1.2220 support level does break down then there is nothing major seen until the psychological 1.20 handle. So, there is scope for at least another 220 pip drop in the near-term.