The week has started with euro plunging once again, early Asian session and continued through European opening, after traders sold the euro against all other major counterparts! The main reason for the sell off was renewed worries regarding the Euro area countries, after a report showed that Eastern European emerging markets were in a high risk of bank collapse due to the economic crisis. The better than expected ZEW data out of Germany were not enough to breathe life into the European currency and therefore the sell off continued.

The EUR/USD pair finally broke important support of 1.27 and made new multi week lows at 1.26. The latter level found buyers immediately as it is a good support level, however with the current negative tone the pair looks poised for more losses if 1.26 breaks after New York open. The pair is trading heavily and traders are buying the greenback with great passion as it is perceived as safe asset! Next level to watch now is 1.25 if the downside persists. The latter level is crucial for the pairs direction and it has to hold for now if we want to see any retracement happening any time soon!

Today the economic calendar had CPI out of UK, with the numbers coming out lower than previous month at 3% and also the house prices declining yet again for another month, making the pound weak and traders wary of what ‘s next! The speculations regarding further cuts by BOE are now even stronger and some analysts predict that the bank may be forced to cut as heavily as FED all the way down to zero! Also we had Empire manufacturing out from US, which showed really negative numbers, showing how bad the economy is contracting in all its different sections, with manufacturing getting hit the most. The future outlook for US economy is dismal to say the least and even the fact the Obama is signing the stimulus package later today, does not give traders any kind of comfort for now.

The sentiment remains negative and at times like these, we see gold rallying against the dollar, as investors are betting on gold in times of crisis. History from other recessions in the past shows gold always the winner of such events and there is big risk to the upside for the coming days as traders know very well that the difficult times are just beginning and more is to be expected. Also in the currency markets, we see that the dollar is rising no end these days, and again this may continue to do so as risk aversion is the only thing that is certain in such uncertain environments! The investors know that right now there is no point in investing in other currencies like euro or the pound, especially after recent reports suggest further contraction and bank exposure in both areas. We all know how bad economic conditions are in the US, and therefore know what to expect in the coming months, however when it comes to other world economies, the US still remains the bigger and therefore the safer for traders to place their bets!

Beware of any further breakouts in the EUR/USD and GBP/USD; if 1.2580 and 1.4130 give way, both pairs are looking good for further downside towards recent multi week lows…

Historical Economic Charts

Empire State Manufacturing

CPI data

ZEW economic sentiment