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- Euro breaks key lows to trade at its lowest levels of the year

- Extremely one-sided positions remain a warning, but losses not done yet

- Forex volatility prices spike ahead of key week of US Dollar event risk

The Euro trades at fresh yearly lows, but can it realistically fall further? These are the key factors and price levels we’re watching.

A look at professional trader positioning shows that large speculators are now at their most net-short the Euro versus the US Dollar since the currency traded near the $1.20 mark in 2012. This in itself warns that the move may be overdone; if everyone’s short there’s no one left to sell. Yet sentiment can and has remained extreme for extended periods of time, and momentum favors continued weakness.

Large Speculators Heavily Short Euro versus US Dollar

Euro Breaks Down, and Here are the Key Factors We're Watching

Data Source: CFTC Commitment of Traders data, Bloomberg

Forex volatility prices have recently spiked to their highest levels in a month as traders gear up for an important week of US economic event risk. In essence this suggests that many are betting on/hedging against further USD moves and increases the likelihood of further EURUSD declines.

Forex Volatility Prices Bounce on Key Week for US Dollar

Euro Breaks Down, and Here are the Key Factors We're Watching

Data source: Bloomberg, DailyFX Calculations

How might we play Euro weakness and broader Dollar strength here? Last week we noted that a Euro close below $1.3460 pointed to a larger breakdown, and indeed it would take a rally above $1.3700 to shift our bearish trading bias. Key short-term levels to watch include support-turned resistance at $1.3460 and November, 2013 lows of $1.3400 and $1.3300. We like selling short-term bounces on the Euro.

See the table below for full rundown on a per-currency pair basis and keep track of changing conditions with future e-mail updates via my distribution list.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

Euro Breaks Down, and Here are the Key Factors We're Watching

Euro Breaks Down, and Here are the Key Factors We're Watching

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