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Euro vs. real economy

The shared currency is learning a lesson today: regardless how strong risk appetite trends are, nothing beats reality at the end of the day. The prophecies of a poor 2012 fourth quarter are materializing so far, after Germany, France, Italy and the euro bloc as a whole have depicted a worrisome end of last year, with GDP figures behind forecasts and the EUR/USD trading back to levels last seen in late January, around 1.3340

… Where to now?

Although ECB and EU officials were trying to smooth GDP releases afterwards, they could not induce market participants to abandon the bearish trend. Why would they? The panorama does not look auspicious so far, even less if we take into account another record high of unemployment in Greece, climbing to 27% during November. Furthermore, the last comments by ECB’s M.Draghi denote some sort of preoccupation when talking about the exchange rate, apart from (logical) opposite opinions from BUBA’s J.Weidmann or President F.Hollande’s wishes of a lower euro. Yes, true, Draghi sees a recovery in the second half of the current year, but there is still quite a long way to go and there are more pressing concerns facing the euro in a near term:

Italian elections are due on February 24-25 and despite prior surveys pointing to a coalition government, the final results are at the moment pretty unclear, mainly because former PM Silvio Berlusconi and ex-comedian Beppe Grillo are cutting distance from the polls’ leaders. Incumbent technocrat leader and PM Mario Monti stands fourth.

The US ‘sequester’, could trigger $1.2 trillion of spending cuts across the board along with more than 700,000 jobs losses if the US Congress is not able to deliver a solution by March 1. Hence, the euro would be facing not only domestic downside pressures, but also ‘foreign’ ones, via a stronger greenback.

Technically speaking, the single currency is now orbiting around the 23.6% retracement of the upside move from 2012 lows at 1.2042 to 2013 highs so far at 1.3711, reinforced by the proximity of the 55-day moving average at 1.3306. The next stop south would be in the area around 1.3230/40, where sits the uptrend line from mid November lows, ahead of 1.3205 (top of the daily cloud) and then the relevant 1.3164 (7-month uptrend). If the selling interest continues, then the next target would be the 38.2% level at 1.3075, preceding the 50% retracement at 1.2878

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