The main trend turned down in the December Euro when the market traded through the last swing bottom at 1.3484. The trend will turn back up if 1.3795 is crossed. Conditions may be oversold on a short-term basis; however, any rally is likely to be a set-up for new short-traders to refresh their positions.
Based on the current round of selling pressure it appears that the market is already over the news about the new governments in Italy and Greece. For a short time last week and on the opening this week, it appeared that the Euro was poised to move higher because the new government leaders were committed to fulfilling the obligations set forth by the other Euro Zone nations. This included making financial austerity the major issue.
Everything seemed to be going well, but then Italian bond yields began to rise, indicating that fear and uncertainty was once again rearing its ugly head. This changed trader sentiment and investors began to dump riskier assets. This trend is continuing throughout the week as yields rise across Europe. Even core Euro Zone nations are not immune from rising yields this time around.
Economic news doesn’t seem to matter to traders at this time since the focus is on containing the spread of toxic debt across the Euro region. Last month’s three prong proposal to restructure Greece’s debt, recapitalize the banks, and strengthen a bailout fund looked good on paper, but doesn’t seem to be a factor as investors have adopted an “everyman for himself attitude”.
While the Euro continues to weaken, traders should watch for the following sign that conditions are getting worse in the Euro Zone. For several months the European Central Bank has been buying risky sovereign debt in Italy. This has helped stabilize the region. If the ECB starts to buy the debt of Spain and Portugal then this will be a sign that conditions are worsening and that debt problems are spreading.
Although the Euro may initially rise on the news that the ECB is buying more sovereign debt, this is likely to be a short-term move. Bearish traders are on to the actions of the ECB and are not likely to let up on the pressure to break the Euro lower. There may be some volatile short-covering rallies; however, these will continue to be treated as shorting opportunities.
