The euro-dollar weekly chart is dominated by a strong and well-established downtrend that has been in place starting May last year, from the high at $1.49. This downtrend line was tested in September with a high near $1.45 followed by a retreat. The current rally to near $1.34 has broken from the trend line area. This behavior suggests continuing weakness in the euro. There is no evidence that the euro can strengthen and move above the established downtrend line.
The euro can fall a long way and the proof is provided by the historical support levels. In a falling trend these levels act as a support, providing a base for a rebound. Once the support level fails, then the level becomes a resistance level and acts to inhibit any future rally.
The first key support level is near $1.29. The market has recently developed minor support near $1.30 but it is the $1.29 level that is historically important.
The next support level is near $1.24. This defined the limits of euro weakness in 2008 and 2009 so there is a high probability it will again provide good support. Still, a fall below $1.24 should find support at $1.19, a level which the currency has managed to trade above in the last 10 years. While unlikely, falls below $1.24 are not unprecedented; the euro traded at $0.88 back in 2001.
Bottomline is: the euro has the potential to fall much lower, but investors will be looking for solid support at $1.24.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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