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This Day in FX History- 01st October:Financial Crisis Spreads to Europe

Although it is difficult to pin down the exact time at which the 2008 financial crisis spread to Europe, due to the high level at which modern economies are interconnected, it is certain that the effects are still being felt across the Euro zone as we have seen recently with softer than expected data coming out of Europe i.e) CPI statistics indicating potential deflation. Recent dovish comments by ECB president Draghi have also weakened expectations of growth in the Euro zone; further monetary easing seems likely as the European economy continues to show cracks. The potential even exists for a fresh crisis in the Euro area as we have recently seen with Greece and now with a number of European car manufacturers involved in a deep rooted emissions scandal.  That is why in this edition of “this day in FX history” we will be focusing on the spread of the financial crisis into Europe.

We have in a previous edition talked about the impact of the financial crisis on a more global scale however looking specifically at the Euro zone, the impact was very similar with both investment and retail bank failures and mass declines in benchmark indices such as the DAX. We can be more specific in our definition of the Euro zone crisis as it is often referred to as the “European Sovereign Debt Crisis.” Specifically the Sovereign Debt Crisis is thought to have started after the collapse of the Icelandic banking system and this of course spread to Italy, Greece Ireland, Spain and Portugal (often dubbed as PIIGS). We have recently seen this come to the forefront once again as Greece made headlines on the back of its inability to make debt repayments. Even outside of the Euro zone in the UK the impact was very similar with both retail and investment banks faltering such as Northern Rock and RBS.

However the macroeconomic impact of the crisis has been featured in previous posts and is well documented on the internet. Rather we will focus on the technical factors, by specifically looking at the impact on the Euro (EURUSD). We can see that the market was already in a downtrend following the topping formation in early March/ late July, however this accelerated at the beginning of October, although a base of support was then formed towards the end of October which marked the beginning of a push higher. This was primarily due to Dollar weakness as uncertainty regarding Wall Street was extremely high, although the downtrend was once again resumed towards the end of 2009. As evidenced by the chart this was a period of extremely high volatility and the intraday swings were huge. Contrary to popular belief it was not as easy as “short everything” rather many traders who succeeded in this environment used a combination of both fundamental and technical analysis techniques to determine price shifts. 

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