EUR/USD: Turkey turbulence tarnishes the Teflon euro, trading at oversold territory

The EUR/USD finally made a considerable move, and the direction is down.

Turkey is the center of attention. The large economy that borders the European Union suffers from high inflation for quite some time. Things have worsened there of late. The central bank did not raise interest rates to stem inflation and currency outflows. President Recep Tayyip Erdoğan nominated his son in law as finance minister, and the nation refuses to ask for help from the IMF.

This week, we learned that the US is imposing sanctions on two Turkish ministers involved in the detention of an American Pastor. The worsening relations with the US accelerated the fall of the Turkish Lira, with USD/TRY topping 5.00 earlier in the week.

The straw that broke the camel's back for the euro was a report in the Financial Times that the ECB is concerned about the exposure of some European banks to Turkey. Spain's BBVA, Italy's Unicredit, and France's BNP Paribas are on the list, all major banks.

The EUR/USD collapsed from around 1.1520 to a low of 1.1432. Cascading stop losses exacerbated the situation. The fall puts the pair at the lowest levels since July 2017.

The pair was already lowe as the US Dollar continued enjoying trade wars, a hawkish central bank, and a robust economy. 

See: Dollar Domination: 3 reasons why the Dollar remains King, and why it could fall in mid-fall

Turkish President Erdoğan is set to address the nation later on, and all markets will be watching.

In the euro-zone, we learned that French Industrial Production rose by 0.6% and that payrolls ticked up by 0.2%. There has been no material impact as the focus remains on Turkey.

Later in the day, the US releases its inflation data for July. The Core Consumer Price Index is forecast to hold onto the pace of 2.3% YoY. 

All in all, markets are rattled by the turbulence in Turkey and the data, vital as it is, may only have a short-lived effect.

EUR/USD Technical Analysis

The EUR/USD is now trading at levels last seen in mid-2017. Momentum has turned sharply lower, but the Relative Strength Index (RSI) is at around 25 on the four-hour chart at the time of writing, in oversold territory, below 30.

This combination may indicate a temporary correction, but the trend remains to the downside. The EUR/USD is below the 50 and 200 Simple Moving Averages.

Looking down, the fresh low of 1.1432 is the immediate line of support. Further down, the confluence detector shows an interesting convergence at 1.1370, with 1.1321 further down.

The previous 2018 trough of 1.1508 now switches to resistance. 1.1575 support the pair on Thursday and in mid-July. Next up is 1.1620 that capped the pair in recent days.