Image by jhyerczyk via Flickr
The U.S. Dollar is trading higher this morning versus the Euro. The September Euro is under pressure on renewed contagion fears. A little less than two weeks since Greece agreed to austere measures to avoid default, the markets are expressing concerns about the state ofItaly’s sovereign debt.
Soaring bond interest rates and a surge in the cost of insuring Italian debt are raising concerns thatItalywill be the next country threatening to default on its debt. The situation began to escalate late last week, prompting top officials from the European Council, the European Central Bank and the European Commission to call an emergency meeting today. Expectations are for the ECB to seek a bigger rescue package for the Euro Zone.
Talk is also circulating this morning that Japanese investors are beginning to unload Italian bonds. This should keep the pressure on the Euro and underpin the Japanese Yen as investors will have to repatriate their currency after selling the Italian bonds.
All in all it looks as if the Greek debt situation is repeating itself inItaly. Traders are definitely reacting the same way by selling Euros first then asking questions. If investors have learned anything from previous experience, it is that the process of solving a country’s debt issues takes a long time. This most likely means the Euro is going to feel downside pressure over the short-term. It seems the only thing that can turn the Euro higher will be oversold conditions. This is likely to occur only to give bearish traders a chance to sell the single currency once again.
Technically, although the Euro is still in an uptrend based on the daily swing chart, downside momentum is building, suggesting that the last two main bottoms at 1.4070 and 1.4039 are likely to fail. This will turn the main trend down and set-up a test of the major weekly chart bottom at 1.3925.
The key to trading the downside momentum at this time is to avoid the short-covering rally. Sure the fundamentals are suggesting this current break has a long way to go, however, selling weakness will be difficult at times because of short-term oversold conditions. Traders have to be careful to avoid getting caught in a bear trap especially as the Euro nears the two bottoms at 1.4070 and 1.4039. Bearish traders are likely to push the market through these points, triggering stops; however, if traders don’t chase this market lower, there may be a wicked short-covering rally.
