The euro fell to its lowest level against the dollar in almost two years as Spain struggled to rescue its troubled banks, fuelling concern that the European debt crisis is spreading to the region’s larger economies.
The euro stood at $1.2445, down 0.33% after yesterday breaking the key support level of $1.25 and trading at July 2010 lows.
The Spanish government's plan to recapitalise its banks with more debt has been vetoed by the ECB as it fears that the plan essentially amounts to backdoor funding of sovereign governments, something to which it is fundamentally opposed.
EUR/USD should continue to remain volatile especially in light of the lack of confidence in the Spanish government's ability to fund Bankia. Eventually, however, the ECB may need to step in to control the crisis from spreading to nearby Italy.
According to Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co, 'Spanish yields have risen to the extent that the nation can’t raise funds easily, and a further gain in the yields will increase the possibility' the country will need a bailout. 'Even from the perspective of its economic fundamentals, the euro is susceptible to selling.'
In data out today, eurozone economic confidence fell for May to 90.6 from 92.9 in April, while consumer confidence met expectations by staying steady at -19.3 in May.
On a technical basis, the currency pair is now firmly in oversold territory with a 14-day RSI of 25. With the ongoing uncertainty surrounding the euro area, the common currency continues to be vulnerable. The next level of key support stands at $1.2250, with resistance at $1.2570.