Forex: EUR/USD capped by political smoke; EUR/USD down to 1.3500

The EUR/USD has lost 200 pips since Friday's 1.3710 high to break down the 1.3590 area and test the 1.3500 support. It seems the 1.3700 is more than a frontier, but has the Euro lost shine or is it merely corrective?

The Europhoria is gone and the single currency is under pressure on the back of news from Spain, Italy and Cyprus. Spanish prime minister Mariano Rajoy and his right Popular Party are engulfed by a corruption scandal. The plot on secret payments list has fueled concerns over government stability and has hurt confidence not only in Spain but the whole Euro area. Just as reminder, Spanish unemployment is above 25%.

On the other hand, recent polls say that former Italian prime minister Silvio Berlusconi's party would gain the next Feb. 24 and 25 elections. Berlusconi is bad for market's confidence as well as Rajoy's scandal and as you may know it, Confidence is key for the Eurozone, both, consumer and business. Cyprus' story is also looming market following Draghi's word on structural problems for the Euro is Cyprus goes default.

BK's analyst quoted in his twitter account a money quote on EUR/USD latest movements: "The premature declaration of victory was based on a myopic view that the sovereign debt crisis was isolated from concerns about growth." And market is focusing its eyes on the Euro just ahead the ECB next monetary meeting.

EUR/USD close to 5-day lows

The single currency has been trading well into the red territory o Monday after setting back from a 14-month high of 1.3710 to a low of 1.3505. A break below 1.3500 would fuel weakness on the pair, although with hourly indicators in oversold territory.

As for the short term, the EUR/USD will face its immediate support at 1.3483 (low Jan.30) ahead of 1.3482 (MA10d) and finally 1.3415 (low Jan.29). On the flip side, a break above 1.3625 (hourly cloud base) would open the door to 1.3660 (hourly high Feb.4) en route to 1.3711 (high Feb.1).

Last week, Goldman Sachs revised its forecast from 1.25 to 1.40 for the coming months, UBS targeted 1.37 as 1-month goal and the BNP Paribas team rose its EUR/USD forecast to 1.38 in the Q1. Now it's Rabobank time with its revision up to 1.40 as year-end target on the back of their negative USD view and the expectation that the EMU crisis will continue to lurch towards a solution." Nevertheless, Rabobank thinks that the road ahead will be smooth."

Last week, BK's analyst Kathy Lien recommended to be aware of profit taking ahead of ECB. In the middle term, "there is a potential for some profit taking in the EUR/USD ahead of ECB meeting. Monetary policy is expected to remain unchanged but everyone will be listening carefully for Draghi's comments on the currency," points Lien. More than words with the euro losing 200 pips in just one single day.

The Day ahead

Tuesday’s calendar offer a batch on services PMI results in the euro zone, although their capacity to weight on the euro price action would be close to nil. Italian inflation figures will follow ahead of EMU retail sales. In the US, the ISM Non-Manufacturing PMI will add a point of salt following Monday's muted day.

Another events to follow:

- RBA Interest Rate Decision (Feb 05 03:30 GMT)
- Eurozone December Retail Sales (Feb 05 10:30 GMT)

- ECB Interest Rate Decision (Feb 07 12:45 GMT)
- BoE Interest Rate Decision (Feb 07 12:00 GMT)
- Chinese January Exports (Feb 08 01:00 GMT)