A sharp fall by the euro against the pound recently puts the pair at risk of a technical breakdown that would point much lower in coming weeks. The euro slid as far as 0.8660 against the pound in late European trade from Tuesday's close of 0.8780. Traders cited increasing optimism about a recovery of the UK economy.
Wednesday's drop put the pair below its 200-day average, at 0.8677, for the first time since early November 2008. It also appeared to break cleanly support at 0.8748, the 50 percent retracement of the euro's rise between October and December. In addition, the euro triggered a bearish right triangle formed by the downtrend line linking the March and May peaks, and the horizontal line at the April and early May lows. Such a triangle is a classic sign of the continuation of a downtrend.
The euro still has major support at 0.8636, its February 2009 low. But weak oscillators - 14-day momentum has dropped to its lowest level since mid-April - suggest a reasonable chance of that support breaking in the next few days. Such a break would point down to at least the 61.8 percent retracement at 0.8498.
The right triangle would imply a much larger fall in coming weeks or months; its measuring objective is the 0.80 level, which is very strong support since it acted as resistance for seven months through October 2008.
DOLLAR: The charts indicate the main impetus for Thursday's move is general strength of the pound, not the weakness of the euro. The single European currency, at $1.3940, remains in an uptrend channel extending back to mid-April.
But the pound may be staging a fresh technical breakout against the dollar. At $1.6065, it has risen above resistance at $1.6040, the 38.2 percent retracement of its plunge from July 2008; any clean break - at least one daily close - would point up to the 50 percent retracement at $1.6826.
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