Learn to Trade – Currency Overview 1st July
Focus on the Euro (EUR/USD)
The last two week has seen the Euro gradually consolidate above the 1.2150 handle. The market has remained fairly resilient relative to the equity markets, which have been trading sharply lower over the course of the last 2 weeks.
Thoughts from the trading floor
The technical picture continues to favour the bears in the short-term. The immediate term outlook has shifted however to a neutral to bullish skew. The market has remained largely resilient to the bearish pressure that has seen risk trades, across the board, which have trended sharply lower over the last 2 weeks. The market held probes down to the 1.2150 handle on Tuesday and has since rebounded to around the 1.2300 handle once more. Gains through the 1.2400 handle should then pave the way for a test of strong resistance at the 1.2680-85 level. The short-term outlook for the market hinges on this pivotal level. Interestingly, the market may have formed a bullish inverse head and shoulders pattern. For this to occur, the Euro must continue to hold gains above the 1.2150 handle, which it did on Tuesday. Then it must drive higher through the inverse head and shoulders neckline, at 1.2420 today. Thereafter a confirmation of the break will occur if the market can climb through the 1.2673 level and close above here. The market would then target the 1.3000 handle. Alternatively, the formation could deteriorate on the break of the 1.2110-50 area. A break and daily close below this support zone should then target the recent 1.1876 YTD low prints.
The last 2 weeks has seen negativity enter markets. This is in stark contrast to the bullish momentum seen in mid-June. This is predominately as a result of a previously “unknown unknown” shock the markets over the last two to three weeks. This shock has been the big deterioration of macro-economic data from the US and Asia. Whereas most market participants had been aware of the debt issues in Europe and market prices had already discounted this news, the rapid deterioration of the macro-economic picture especially from the US has shocked the markets. Fears of a double dip recession or even a deflationary depression now are steadily becoming increasingly likely (i.e. the tail risks for this type of scenario are broadening). The macro-economic data releases have become a major focus for the market. Tomorrow’s Jobs data may serve to be the trend setter for the Euro for the rest of the month. Strong data may be the catalyst which sparks the break of the inverse head and shoulders neckline.
Bull View
The bulls have steadily edged back into favour over the last 4 weeks. They will look for the market to break through the 1.2455 level and target the 1.2680-85 level over the next 2-4 weeks. They will hope for the US jobs data to be stronger tomorrow.
Bear View
The bears will look at the recent creep higher in the Euro as a small recovery in the anticipation that the market sets itself up for an extended drop later on in the year. However they will also look out for the fact that if the US economic recovery gets derailed, which showed some signs of this last month, then rather than being bearish USD vs. Euro it may instead mean that the world refocuses on all the bad news currently in the market causing the Euro to collapse further.
Futex View
We continue to favour the bears in the medium and long term; however we have turned somewhat bullish in the immediate to short term. We believe that the Euro may look to recover ground to the 1.3000 area by the end of the summer, before setting itself up for another drop going into the autumn.
