Category: Forecasts

After trading in a tight range for most of the session, the EUR/USD is moving sharply higher, confirming Tuesday’s trend line breakout and setting up the market for further upside action. While yesterday’s action was related to expectations of positive moves by the European Central Bank, today’s surge was triggered by speculation the Federal Reserve is preparing to take steps to boost the economy.

Today, the Fed sent a strong signal to traders that it is preparing to make moves to stimulate the economy unless there is new evidence of stronger growth. Most traders now believe the chosen form of stimulus will be additional bond purchases.

In its official statement the Fed said, “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

The words “fairly soon” are driving up demand for higher risk assets at the mid-session, pressuring the U.S. Dollar while helping the Euro gain ground. The minutes also showed that the idea of additional stimulus is gaining support amongst members. However, “substantial and sustainable strengthening” could mean that the Fed has set some pretty high requirements for additional stimulus.

Technically, the EUR/USD is breaking out over Gann angle resistance at 1.2517. Additionally, the currency pair is also trading on the bullish side of a major retracement zone at 1.2394 to 1.2478. This area is now expected to be new support.

The main trend is up decisively up on the daily chart with main bottoms formed at 1.2255 and 1.2241. The strong rally on the daily chart is also attracting attention on the weekly chart. Although the main trend is still down on the weekly chart, the Euro is beginning to work its way through a series of former resistance levels, suggesting that short traders are beginning to weaken their stance. Further short-covering is expected if the dollar continues to weaken because of expectations of Fed activity and if the ECB decides to launch its own bond purchasing program. 

The September Euro is breaking out over the resistance line of triangle chart pattern, perhaps setting the tone for a bullish trading day. In addition to the trend line, the single currency is currently approaching a previous main top at 1.2390 and a major 50% price level at 1.2405. Overtaking all of these levels will put the Euro in a position to challenge the August 6 top at 1.2450.

A trade through this top will mean the market will have one more upside barrier to overcome at 1.2489. Overtaking this important Fibonacci level will put the market on the bullish side of a major retracement zone, indicating that the buying power is currently stronger than the selling power at current price levels.

Daily September Euro Pattern, Price & Time Analysis

Since bottoming at 1.2051 on July 24, the September Euro has zigzagged its way to today’s breakout. The first rally most likely took out the short-traders with the subsequent break attracting fresh buyers when the market tested a retracement zone at 1.2251 to 1.2203.

Fundamentally, the September Euro bottomed after European Central Bank President Mario Draghi vowed to do “whatever it takes” to support the Euro. Although traders believed this meant the ECB would begin buying Spanish and Italian debt, it never really followed through on Draghi’s pledge. However, it didn’t seem to matter since interest rates have dropped in Spain and Italy anyway, easing some of the pressure on the Euro.

Problems still persist in the Euro Zone, but the current retracement on the daily chart suggests that short traders are not going to stand in the way of this rally until the currency reaches more attractive price levels or until the crisis rears its ugly head once again. Until then, don’t fight the trend on the daily chart.