Despite Cyprus only represents a tiny little 0.2% of the entire Eurozone GDP, the sell-off is more about distrust towards European leaders, as the infamous decision to confiscate part of the bank deposit from Cypru's citizens as part of a new bailout tax. Panic selling has extended to the Euro, in a clear sign of fears for a potential outflow of capitals from the bloc's currency.
According to Adam Button, editor at Forexlive: "On Monday, the euro will fall on fears of line-ups at banks elsewhere in Europe with honest citizens draining accounts and terrified their country could be next."
He adds that "newscasts will broadcast sensational images at banks in Cyprus for the next few days but don’t tune in, instead watch for signs of panic elsewhere in Europe. If it doesn’t materialize, buy the dip in the euro."
On this kind of selling pressure, one should not let emotions take over, and as IFR analyst Andrew Spencer mentions on his early Asian comments, Tokyo players are likely to step in for some bargain hunting on crosses like EUR/JPY, which also fell off a cliff from 124.00 all the way down to 121.60. They also suggest that Cyprus news should be USD positive.
Looking at potential supply / demand levels in the EUR/USD, the key area to break on the downside remains 1.2875/80, where the last few buyers from within 1.2875-1.2935/40 demand-sensitive area are thought to be camped. Below that, the sky for USD bulls gets pretty clean until faced with 1.2730/1.2660 demand area. On the upside, there is a major gap that bargain hunters will try to fill up, with 1.2960/70 (triple bottom since March 1) ahead of 1.30 as tough areas to overcome.
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