EUR had a torrid performance, dropping more than 2% last week as the dollar rebound gathered pace. Today the dollar index (the USD against its major trade partners) broke through a key resistance zone at 82.55 – the 50-day sma (on the close), which opens the way for a deeper recovery back towards May’s 84.00 highs.


If DXY continues to recover then this has big implications for EURUSD, which makes up a large part of the dollar index. EUR came under further pressure this morning, but so far 1.3070-85 – a key support zone and a cluster of moving averages – is protecting the downside. There have been some positive fundamentals out of the Eurozone today, including a stronger German IFO reading for June and the strongest reading of Italian consumer confidence since March 2012, which is also protecting EURUSD downside. However, we believe this pair is still vulnerable in the short term, as the spread between German and US 10-year bond yields dropped to a 3 year low last week, which should be EUR negative. We think EURUSD could be a sell on rallies and key resistance levels to watch in the short term include:



  • 1.3180 – 21-day sma




  • 1.3250 – support zone after last week’s Fed meeting.



A break below the 1.3070-85 sma cluster is a very bearish development for this cross that opens the way to 1.3000 (a key psychological level) and then to 1.2960 – the lows from 31 May.


Figure 1:


EURUSD


EURUSD