EURUSD: the "bear" necessities

This pair made a bearish development on Thursday after it fell below an important level of support at 1.2754 – the July 2013 low. We mentioned earlier this week that the combination of a surge in the dollar and continued weakness in the EUR’s fundamentals could weigh on the single currency for the long-term. The break below the July 2013 low is significant, and in our view this opens the way to further downside for the long-term.

The case for a weaker EUR:

The prospects for global interest rates are dominating the market’s consciousness right now. Next week’s ECB meeting could shed some light on the ECB’s next steps and whether further easing is on the cards. Until we hear from Draghi next Thursday, the market is likely to continue to price in a dovish stance at the ECB versus a relatively hawkish stance at the Federal Reserve, which could be EUR negative. For more on next week’s ECB meeting, read our Week Ahead.

The technical view:

As mentioned above, the technical view is also bearish for the EUR, after the close below key support at 1.2754. Immediate support is now 1.2661 – the November 2012 low. Since the trading and momentum indicators are all pointing lower, if we fall below support from November 2012 then we could see back to 1.2043 – the July 2012 low.

We have also been keeping an eye on the daily RSI, which is in oversold territory. When this happens it can signal a reversal, however, in this instance we believe that the fundamental factors could continue to weigh on the EUR, and any strength in EURUSD could be short-lived. Short term resistance lies at 1.2864 – the high from Wednesday.

Takeaway:

• The technical and fundamental picture looks bleak for the EUR.

• The break below 1.2754 opens the way to 1.2661 – Nov 2012 low.

• We think that we could drift lower into the end of the week, particularly if we get strong US data later on Friday, and 1.2661 could be the cards ahead of next week’s ECB meeting.

• We believe that momentum is firmly against the EUR as both the fundamental and technical outlooks are negative, and once the Federal Reserve starts to normalise interest rates, the prospect of a dovish ECB well into 2015 could cause a drop back to 1.2043 – the July 2012 low.