EUR/USD: is 1.20 now the next stop?

*** Please note today will be my last until my return on January 5. Wishing you a Merry Christmas and a happy New Year! ***

It is understandably a very quiet day with the stock markets in Italy and Germany closed for the Christmas Eve. Elsewhere, most traders are probably out today too although that does not necessarily mean the markets won’t move. In fact, the lack of volume means there could be bouts of high volatility. Still, that will be kept to a minimum given that it is going to be a shortened trading day. The London Stock Exchange will close at 12:30 GMT, with the European exchanges following suit at 13:05 GMT. In the US, the markets will also close early with US futures open for trade until 18:15 GMT. In London, the main mover is Smith & Nephew, which is up 7% after Bloomberg reported that US surgical implant maker Stryker was planning a takeover bid for the company in the coming weeks. But generally investors are exercising a bit of caution after the S&P warned of downgrading Russia while the Greek short-term bond yields are back above 10% with just 5 days to go until the third and final round of voting in the presidential election. If the coalition government fails to secure a majority of the vote then it will lead to an early general election in February. The big fear is that the radical anti-bailout Syriza party could be voted to power.

If seen, this could be very news for the European markets and also the euro. In fact, the latter looks set to drop to at least 1.20 against the dollar over the coming weeks. As highlighted the possibility on Monday, the EUR/USD has now broken a long-term bullish trend line at 1.2220, which has thus paved the way for further follow-up technical selling. This trend line I am referring to was derived from connecting the low point of 2010 with that of 2012 and extending it to the future. It provided some support on Monday but now that it has been broken, there’s really not much support seen until 1.20 on the weekly time frame. Following last week's formation of a huge bearish engulfing candle, further sharp losses could be the perfect gift the bears were hoping to receive during this festive period. As well as the Greek vote, there will be some important data out next week which may provide the stimulus for the next move. Meanwhile as can be seen on the daily chart, there are a couple of Fibonacci extension levels standing on the way towards 1.20, at 1.2155/60 (127.2%) and 1.2045/50 (161.8%). But as things stand, these are only likely to provide short term respite on the way down. Meanwhile the short-term technical outlook would turn bullish on a potential break above resistance at 1.2250. In that case, price may stage a short-covering rally towards the resistance trend line between 1.24 and 1.25.