EUR/USD makes a key breakdown

June 28, 2016

EUR/USD made a key breakdown below major support on Friday after the outcome of the UK’s EU referendum was acknowledged. This breakdown occurred as both the pound and the euro were quickly sold-off on speculation of impending financial and economic turmoil in the UK and European Union as a likely result of the Brexit decision. At the same time, the US dollar was heavily-bought and boosted as a safer alternative to the embattled UK and euro zone currencies.

The resulting plunge for EUR/USD on Friday prompted a swift breakdown below the major 1.1100 previous support level as well as the key 200-day moving average. In the process, the currency pair hit a new three-month low at 1.0910 before paring some its losses later in the day. As of Monday, the currency pair has remained trading below 1.1100 and the 200-day MA as continued pressure from Brexit consequences have plagued EUR/USD.

Overall pressure on the euro against both the US dollar and the yen could likely continue for a few reasons. With the Brexit result comes expectations that other European Union members may move to hold their own referenda deciding whether or not to stay in the EU. If this indeed becomes an increasing occurrence amongst current EU countries, the viability of both the European Union and the Eurozone (and in turn, the euro currency) could become even more questionable. Additionally, because of the potential financial and economic turmoil that may be caused by the Brexit decision, the European Central Bank may opt to implement further monetary easing measures that could weigh heavily on the euro.

Meanwhile, although the US dollar has been tentatively boosted by a shift away from the euro and pound towards the yen and greenback, the dollar may not emerge unscathed from the UK’s historic vote outcome. Since the results of the referendum have been announced, the implied probability of a Federal Reserve rate hike any time this year has plunged dramatically, with some market participants now even speculating on a possible rate cut. Whereas Fed-watchers had been expecting one or two rate hikes this year, if there are no hikes and a possibility (however remote) of a rate cut, the dollar could also be dragged down.

With these and other dynamics potentially pressuring both the euro and the dollar, the EUR/USD has arrived at a precarious position. This position may also be seen as a question of which currency will prove the weaker. From current price action, it appears that the market has leaned towards a weaker euro for the time being, especially since the Brexit outcome has more directly impacted the euro rather than the dollar.

From a technical perspective, much depends on whether or not EUR/USD continues to trade under the noted 1.1100 level and 200-day MA, now both as resistance. If it does so, this would be a strong bearish indication, and the next major targets to the downside remain at the key 1.0800 and then 1.0500 support objectives.

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