- The EUR/USD started the week by setting fresh 13-month lows.
- The Turkish crisis and the potential contagion is in full swing after the CBRT failed to calm investors.
- The technical picture points to oversold conditions, but the bounce is yet to come.
The EUR/USD is trading well below 1.1400, extending the falls after the collapse on Friday. Turkey remains in the spotlight. The nation bridging Asia and Europe suffers from high inflation and capital outflows. The central bank, guided by the government, refused to raise interest rates to curb inflation and the drop in the Turkish Lira. A political crisis over a jailed US pastor sparked a collapse in the currency.
The crisis became global after the European Central Bank reportedly expressed concerns about several European banks. In addition to the contagion to the euro-zone, other currencies of emerging economies have suffered as well. The risk-off atmosphere in markets pushes the US Dollar higher against all currencies except the Japanese Yen. The European exposure to Turkey exacerbated the falls of the common currency also against other peers.
Turkey's President Recep Tayyip Erdoğan sounded defiant in a series of speeches. He blames the US and sticks to his stance against higher interest rates. The Central Bank of the Republic of Turkey (CBRT) took some measures to stabilize the system, providing more liquidity among others. The announcements initially sent the Lira higher, but it fell afterward. Also, the Interior Minister announced they would take action against 346 social media accounts that have been creating a negative image of the Lira. Markets want to see a hike in interest rates and an improvement in US-Turkish relations.
For more: Turkish lira lost more than 25% against the dollar in a single week - What happened?
On Friday, US core inflation came out at 2.4%, above 2.3% expected, and added some support to the US Dollar. Today's calendar is light, allowing the focus to remain on the Turkish crisis. If the CBRT eventually gives in and hikes rates, the Lira could stabilize, and the EUR/USD could rise. Otherwise, the pressure continues.
EUR/USD Technical Analysis
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The daily chart of the EUR/USD shows that magnitude of the fall. The pair is back to trading at levels last seen in July 2017. The Relative Strength Index on both the daily and the four-hour charts is below 30, indicating oversold conditions. So far, this has not resulted in a bounce. Momentum is robust to the downside.
The low point at the time of writing is 1.1365, which serves as an immediate cushion. The round number of 1.13 separated ranges in the spring and summer of 2017 and is a significant level to watch. 1.1225 is next after working as resistance in mid-2017. Lower, the round number of 1.1000 comes into play.
Looking up, the day's high at 1.1410 is immediate resistance. Next up we find the previous 2018 low of 1.1508, followed by 1.1530 that supported the pair in early August.
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