We worried about the euro in our post yesterday and it appears our worries were well founded. The European session led to a huge short squeeze in the euro, pushing it briefly above our resistance level at 1.3016. The gains were short-lived, however, and the euro has plunged back below 1.28.

We can see the huge reversal on the daily chart. The implications going foward are bearish. The Eurozone rescue efforts won’t be seen as a failure unless we fall below the 1.2521 low from May 5 but at this rate it won’t take long.

Analysts around the world were quick to dismiss the rescue efforts. Some noted how the 750 billion euros will be enough to cover funding needs for Greece, Portugal, Spain and even a portion of Italy’s deficit over the next three years but others noted that the required deficit-cutting and growing public unrest in Germany and Greece are threats.

We won’t argue with the market’s reaction. The European sovereign debt crisis will be over when it’s over. Some stability above 1.2521 will be a good sign but until we see a close above 1.3016, we will remain in the bearish camp.

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The market seems to take every small bounce as yet another opportunity to sell the euro. Earlier today we traced out a low of 1.2804 before bouncing a full 100 pips. The euro then started to fade again and eventually fell to 1.2790. Support is thin below 1.28 with 1.25 as a target that many are touting.

One school of thought has shorts being scaled back leading up to the ECB rate decision in about 16 hours’ time. That would lead to a euro bounce. The other school believes the ECB has very little ammunition to fight the falling euro. ECB officials have tried to ‘talk up’ the strength of the Greek bailout for weeks now and the market is now at the point where there really nothing Trichet and Co. could say to stop the tide of euro selling. The focus has shifted to actions they could take and policy moves such as bond buying or interest rate cutting are far fetched. The biggest risk to the euro is that policy makers sound tired, repetitive and helpless. That would unleash another round of euro selling. In the lead-up to the decision, however, we don’t expect a further powerful push to the downside. The risk are likely skewed toward consolidation but in the short-term 1.2790-1.28 will be key.

It’s a scary day in markets today. Stocks are getting beat-up like the credit crunch was still raging and the S&P 500 have given up some important support. Commodities are down big. The Australian dollar is getting crushed despite a rate hike that wasn’t fully expected. And our long gold trade is giving back most of its gains (but it’s still in the money).

Everyone knows the markets are in for a rough ride at some point after the generational rebound from The Great Recession. Is this the big correction? We think it could be, but our conviction is still low.

In the meantime, we look to the charts. Yesterday, we talked about USD/JPY and we have to note that it got as high as 94.99. We warned about the possibility of a false breakout. Now that we’re back to 94.40, we think the chance of a reversal is growing but we reserve judgement until Japan comes back from holiday at the end of the week.

The pair we want to focus on today is EUR/GBP. The euro is getting smashed today. Greek 2-year yields are back up to 14% and European policymakers must be starting to think about hitting the panic button.

Two months ago, the euro was beating up on the GBP on worries about a hung parliament in the UK. Now, it seems like electoral deadlock in Thursday’s election is among the most minor problems in the eurozone and its periphery.

This is an important break below support at 0.8601. We expect a bounce to a re-test of this line and that bounce should be sold. The problems in Europe far outweigh concerns in the UK. Moreover, the Conservatives have gained momentum heading into the election and could pull out a majority (we put the odds at 50-50).

We target 84.50 or 84.00.

The euro began to unravel yesterday when S&P’s actions hit the wires. First, Portugal’s credit rating was cut (to A-/A-2 with a negative outlook. Second, S&P cut Greece’s sovereign credit rating to junk status, a three notch downgrade, with a negative outlook to go along with an expectation of almost no economic growth through 2016.

We might see some initial consolidation after the violent breakdown in the euro but the technical path downward has been reassured. The euro is in deep trouble with no foreseeable way out. Any bounce is going to be sold heavily by macro traders. Following the pack is the only way to play euro trades.

We see the risk of a sharp, short-covering rally as minimal. Even a catalyst such as a huge bailout of Greece will only serve as a selling opportunity. The market is going beat up the euro until it bleeds. At some point, the market will start to stabilize by moving sideways but that is the best case scenario in the short term.

Greek 2-year notes are yielding 18%! There is remarkable strain here and the situation will eventually spread. For those who are not already in a euro short position, look for selling opportunities. But for those who already hold them, hang on or add.

What was most surprising in today’s market action was not the size of the fall in the euro, but that the euro managed to gain against several currencies.

A chain of events has led to the powerful selloff in EUR/USD and the pair has fallen to the lowest since May 2009.

The moves were kicked off as the European Commission revealed that Greece’s deficit, at 13.6% of GBP, is worse than originally reported and could be further revised down by 0.5 percentage points. The euro then bounced on reports that Greece could ask for a short-term loan while details of a bailout package are worked out, in a so-called “bridge loan.” Then, the selling resumed when Moody’s cut Greece’s sovereign ratings to A3 from A2 and placed it on review for further possible downgrade.

Now, with the G20 upcoming, there is speculation that the body could increase pressure for some sort of action. It seems as though the bond market is pushing the agenda with yields on 10-year Greek bonds surging to 8.70%, compared with 3.04% for comparable German bunds.

There is also talk of panic selling in euros as stop losses are blown out. The technical picture points to continued losses.

The next major support level isn’t until 1.2896 and that certainly is a major low as it represents the correction low in April last year. There is talk about some support at 1.3150 and there will be psychological support at 1.30.

Overall, however, the situation is negative and we don’t expect any major euro rally. Sell any bounce.

Greece got its lifeline on the weekend in the form of 45 billion euros from the European Union and International Monetary Fund. It’s a staggering amount of cash that will be lent at about 5% for three years. Greece does not yet want to take the cash and instead will try to tap the market in the hope that the EU/IMF backstop will bring down borrowing costs.

Overall, the value of the loans is much higher than the 10-20 billion euros the market was expecting and the interest rate is about as expected. In the short-term (this week) this should calm European nerves and boost the euro. The market is massively short euros and this is sure-fire catalyst to spark a short-term rally.

Technically, the picture is clear.

We have a long-term downtrend that has been broken after a clear double-bottom formation. The measured target of the double bottom is 1.3912, which is above resistance at 1.3816 but below the early-Feb high of 1.4025.

We don’t think the market will have a huge rebound because there are still lingering fiscal problems in Spain, Ireland and Portugal that must be solved. Moreover, downtrends rarely reverse. They usually first experience a period of sideways movement. Given that, we expect to see and range-trade develop between 1.35 and 1.40.

The euro continues to get battered on worries about Greece and the pound sterling continues to bounce on hopes for a clear Conservative win in the May 6 election.

Technically, we are seeing a nice channel moving lower on the two hour chart. Above that, there is further resistance from the month-long downtrend.

At one point, we sense a great deal of optimism about Greece. The European Union appeared united and the austerity plan seemed legitimate. That is all starting to change. It’s clear EU leaders can’t work together and Greece continues to find hidden debts.

The bond vigilantes returned today and pushed Greek spreads to a fresh record of 410 basis points above German bunds (10-year). For euro traders, that’s a sell signal of the clearest kind. The Greek story is about to take another leg for the worse and there is no trade but to sell the euro.

Euro bulls got pounded today after some headlines suggesting Greece and Germany are at odds on some sort of financial backstop/bailout plan. A report suggested Greece could be headed to the IMF and the euro promptly fell 125 pips.

Technically, yesterday’s prices action put a bearish inverted pattern on the daily chart after a failed upside breakout. It’s a signal we wish we would have heeded.

The technical picture is now bearish although it’s clear that the euro is trading on politics more than technicals. We remain bullish on the euro, having went long at 1.36. We are now right our entry point.

We still very much believe in a euro rebound to at least 1.40. We are, however, going to put a stop at 1.3532. If we get stopped out, we may look to re-enter on a quick spike below 1.35.

t’s the time to stay nimble and maintain nerves of steel. We still have a great deal of conviction on the long side of this trade but if 1.3438 gives way, we may be forced to re-evaluate.

Yesterday we said we were growing bullish on the euro. It rallied nearly 100 pips today, so we’re feeling pretty good about that. We like the long EUR/USD position more than ever.

The headwinds for the euro should subside for some time on the fundamental side. The budget cuts look good and the ECB and IMF are supporting Greece. The cuts may never be fully implemented but Greece’s government has gained some credibility for now.

Remember that the market is heavily positioned against the euro. Shorts need to cover and this move higher is going to start to shake them out.

We outlined 1.40 and 1.42 as our targets. Here you can see where some of the initial resistance comes in. 1.3788 is the first target followed by 1.3839. There will be lots of sell orders clustered at those levels. After that, we expect smooth sailing.

The euro continues to fall and there is really no end in sight. The market has zeroed in on Greece and it’s going to push until the story breaks. It’s looking increasingly like Greece will be bailed out as bond vigilantes bump Greek sovereigns.

Even if a solution is found to the problems in Greece, then the market will turn to Spain, Portugal, Ireland and Italy as the next victims. Today Spain released unemployment at 18.8% and a day earlier Portugal’s government released data on an extremely high budget deficit. Portugal’s central bank Governor Victor Constancio said “nobody expected” such a high deficit and that “the next few years will be more difficult.”

All of this has been priced into the market, and that’s why EUR/USD looks like this:

It has been a swift and incredible fall from 1.51. We’re not prepared to make a short-term call because we see the risk of a fall to support at 1.3748 and a short-squeeze to 1.42 as an equally balanced trade.

What we are wonering about is how the market is going to interpret what’s next for Greece. At the moment, there is no reason for the events in Greece to come to a head. Just last week, Greece raised $9 billion euros in a debt auction that was five times oversubscribed. A real funding crunch is nowhere on the horizon yet with Greece destined to remain on the front page for at least the next week, we feel like the market is going to force some action.

European officials have made it clear that Greece won’t be forced out of the eurozone and there are murmurings that the EU is preparing a bailout. We wonder how a bailout will be interpreted. In the short-term it would devestate the bond vigilantes and we lean towards thinking the stability generated from such a move would be a euro-positive. It would undoubtably cause some of the euro shorts to cover and that should cause the snap-back rally we fear.

On the other hand, a bailout would absolutely send the wrong signals to the other eurozone members in trouble and it would anger the fiscally responsible Germans. It’s the sort of thing that could lead to the eventual demise, or reformation of the euro.

As you can see, the euroarea is in a jam with no easy solutions. For the foreseeable future, we will be looking for rebounds and using them as opportunities to sell.