The euro will continue to suffer from not only the interest rate differential but the simple fact that a lot of people are throwing money at US treasuries right now.
The euro fell all the way down to the 1.11 handle underneath, which is where we had bounced from previously. That being said, the euro looks as if it is still threatened, as we are closing so much lower than the previous couple of sessions. The 1.11 level has been important in the recent past, but longer term it is simply yet another handle.
If we were to break down below the 1.11 level, I think it is likely that we will go looking towards the 1.10 level underneath which is a much more significant level on longer-term charts. It also has a lot of psychology attached to it so that makes a certain amount of sense. If we break down below the 1.10 level that would be a complete capitulation of the euro in general. I do not necessarily expect that to be the case, but a move down to the 1.10 level certainly makes a lot of sense as long as we have concerns about the European Union losing access to natural gas which could very well be the case.
Furthermore, we have the interest rate differential to pay attention to, as the Federal Reserve is likely to continue its hawkish stance, while the European Central Bank certainly will not have any real opportunity to tighten. Because of this, the market is likely to continue to see a lot of volatility and downward pressure, so I look at any type of rally at this point through the prism of it being a “relief rally.” Because of this, I am more than willing to short the market at the first signs of exhaustion after a bounce, as it has proven more than once that it has no real will to hang on to gains.
Of particular interest would be the area just above 1.12 and the 50 day EMA. Both of those levels should continue to offer selling pressure, assuming that we even get there. The euro will continue to suffer from not only the interest rate differential but the simple fact that a lot of people are throwing money at US treasuries right now. Beyond the headlines, credit spreads have blown out quite a bit during the early hours on Tuesday, meaning that there is even more fear in the market from that standpoint as well.
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