Today’s trading session saw another sharp drop in the Euro which initially appeared stronger enjoyed some upward momentum, as little as it was, which was a sigh of relieve for those trading on a stronger European currency. After the EURUSD failed to breakout above the 1.4000 level, a double top formed just below it, this currency pair has been on a sharp downward projector which took the EURUSD down by over 1,600 pips without a real pause. Economic data has come in disappointing and the European Central Bank has slashed interest rates to 0.05% which caused sharp sell-offs in the Euro and further supported the correction in the EURUSD. Now the ECB is contemplating a stimulus package which is likely to further pressure the Euro lower. While talking a strong Euro on the financial markets exporters like Germany and France secretly and sometimes openly favor a weaker European currency which makes goods more attractive to foreign buyers.
While everyone agreed that an exchange rate of 1.4000 in the EURUSD was not warranted and forex traders were often confused many may also argue that an exchange rate below 1.2400 is equally unjustified. There are calls for a much weaker Euro to come which could drop this currency pair down to parity with the US Dollar. This event is rather unlikely. While many favor a weaker Euro at some point European pride will kick in and support a strong Euro in order to keep more of the global market share.
There is plenty of support from BRICS countries; Brazil, Russia, India, China and South Africa, for the Euro in favor of the US Dollar and demand from those central banks are likely to limit the current slide above the 1.2000 mark. Economic reports have shown a much weaker European economy, but shy of a third recession for now and an avoidance of such may further support the Euro. Forex traders seek the next catalyst for a bigger move and short-covering could initiate upward momentum.
Is the Euro really that weak? Looking at the EURUSD it is basically pegging two weak currencies against each other. The US Dollar has rallied sharply at the same time the Euro dropped which magnified the sell-off. AT some point forex traders will need to realize floating trading profits which means we may see a full price action reversal. US economic data has not been that positive and after sharp moves reality often forces price to a more normalized level which may be just around the 1.3200 mark for the EURUSD.