With several European downside risk events set to occur towards the end of the week, the recent pullback in euro/dollar (EUR/USD) could be attributed to returning concerns about the Spanish economy, a potential credit rating downgrade by Moody's, a report that the Bundesbank is checking to see if new bond-buying plan is legal, and some exhaustion from the two-month steep ascent from the 1.2041 low to the 1.3171 high.
Early in London, price has corrected a total over 300 pips, since making a new five-month high early last week. The possibility of a Spanish request for a bailout may occur as the Spanish government releases its reform package and next year's budget on Thursday, both of which might address benchmarks required for a potential bailout request.
Bearish price action appears to be stalling at the 1.2900 level, but the pullback may continue as uncertainty heightens. In order for further downside to resume, a close below, both the 200-day simple moving average and the 2011 low price of 1.2860 must occur. A breakdown below that key area could see downside continuation towards the 1.2605 level which is also the 50% retracement of the recent steep bullish run.
If the euro manages to trade above the 1.30 level by the end of the week, the correction is over and upside targets will include the 1.3450 level.