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Euro loses shine. Is it merely corrective?

The euro came under pressure on Monday and retraced last week's gains, as political turmoil, soft data, and profit taking weighed on EUR/USD.

While Spanish Prime Minister Rajoy faces resignation calls on newspaper reports of allegations that he received illegal payments, Spain's employment figures came in below expectations. This combined with a technical correction sent EUR/USD back below the 1.3600 mark, and more importantly below the 1.3550/40 support area.

Even though aside the euro, the FX market has been rather quiet, the cautious tone prevails in other financial markets, with stocks broadly lower and gold gaining on its safe-haven status.

Euro falls toward 1.3500

The shared currency extended its setback from a 14-month high of 1.3710 to a low of 1.3504 (200-hour EMA) during the New York session, making investors wonder if there is actually a top in place around 1.3700. A break below 1.3500 would fuel weakness on the pair, although with hourly indicators in oversold territory, EUR/USD could see some consolidation before another leg lower. The 1.3460 area stands as immediate and important support level (23.6% retracement of the 1.2660/1.3710 rally).

On the other hand, EUR/USD needs to regain the 1.3600 level to ease the immediate pressure and re-focus 1.3700, as in daily charts picture remains quite bullish.

"While today's European headlines have injected some market volatility, last week's steady Fed policy decision and steady U.S. jobs reports suggests that previous trends can continue", says Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank. "For the near-term we lean towards gains in most foreign currencies, but further possible weakness in the Japanese yen".

Next Thursday, the European Central Bank will decide on monetary policy, and even though it is well expected to remain on hold, small expectations have developed that Draghi will make efforts to talk down the EUR, says the TD Securities team. "That notion could build and continue to weigh on the single currency ahead of the meeting, although we suspect they are overblown".

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