Euro Dragged Down Toward Key Psychological Level

Investors cast their votes of disapproval for the Irish bailout plan by bashing the euro, and worries of further contagion sent spreads on peripheral and other European debt wider.

The single currency broke through its 200-day moving average of $1.3130 and headed towards the 1.30 euros per dollar, a key psychological level.

Dublin, Ireland
Firecrest Picture | Robert Harding | Getty Images
Dublin, Ireland

"It's a big round number. It's a psychologically important number. A lot of the stops are there. A lot of corporate hedges are wrapped around that level. Right now the shorts are completely running the table. They're looking for any excuse to press it harder," said Boris Schlossberg of GFT Forex.

"The trade is going in such a one way trade, I think we're reaching a point of sentiment extreme."

Schlossberg said 1.30 would open the way for a move to 1.2750.

European Union finance ministers agreed to an 85 billion euro loan package for Ireland this weekend.

"It's quite easy to get this market upset and quite riled up. It just feels like we're marching toward a Portuguese bailout. How they time it, what the Portuguese governments response is is all part of the story. There's the possibility that it all becomes self-reinforcing anyway," said Alan Ruskin, head of G-10 foreign exchange strategy at Deutsche Bank.

Ruskin said $1.2918 would be the next area he is watching for support, and if the euro breaks that it could head toward 1.2560.

"We're seeing diabolical price action in the periphery bond markets. In other words, Spanish, Italian yields have gone out by close to 25 bps today, which is terrible..You're seeing it spreading to countries that were previously immune. Even Belgium is in the frame. Belgian yields have backed up. There's no let up in the contagion effects. It's spreading further afield than you're usual suspects," Ruskin said.

He said the market reaction is not a total surprise. "The bailout wasn't a massive surprise in terms of detail. There was some separation in terms of subordinated senior debt. The duration of the IMF loans was good news," he said.

"The bad news is Ireland is tapping its own pension for a large amount of funds and the markets didn't like that," said Ruskin.

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