- The European Union is grappling with fears of financial contagion following the news that Credit Suisse will not receive additional bailout assistance from Saudi financiers.
- The Swiss bank has been at the heart of various financial problems in recent years, and its difficulties have only intensified due to the lack of support.
- As a result, the Credit Default Swap (CDS) market for Credit Suisse has priced in a 36% probability of default, causing an exodus of capital from the European Union.
- This is primarily because Credit Suisse has extensive connections throughout the continent, which raises concerns over the potential ripple effects of its troubles.
In response to these events, the EUR/USD experienced a sharp decline, plunging toward the 200-Day Exponential Moving Average (EMA) and losing 200 pips by the time the New York trading session began. If the market breaks down below the 200-Day EMA, it could trigger a wave of selling pressure, pushing the Euro further down to the 1.03 level, or even as low as parity. This scenario would likely result in significant US dollar strength, as investors seek safety amid the turmoil. In such an environment, the market would continue to favor the US dollar, with funds flowing toward the US Treasury market.
A rally in the Euro seems unlikely to hold in the near term. The 50-Day EMA is expected to provide some resistance on the way up, and the market has already faced challenges at the 1.07 level, an area that had previously been difficult to surpass. A break above the 1.08 level could open up the possibility of reaching the 1.10 level, although this currently appears improbable.
Rallies are Likely to Face a Strong Resistance
The Euro had experienced a slight rally recently, driven by traders anticipating the Federal Reserve cutting interest rates in response to the bailout of a California-based bank. However, if the European Union faces contagion risks due to Credit Suisse's troubles, this could level the playing field, negatively impacting the financial environment overall.
Ultimately, the Euro has taken a hit amid concerns over financial contagion stemming from Credit Suisse's struggles and the lack of additional bailout assistance. This has prompted a shift of capital away from the European Union and towards safer investments such as the US dollar and the US Treasury market. As the situation unfolds, the Euro's trajectory remains uncertain, and any rallies in the short term are likely to face strong resistance.
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