EUR USD Mid-Week Analysis for the Week of November 21, 2011

Thin trading conditions are the highlight this week in the EUR USD market as traders may already be in a holiday state of mind. The Euro has seen two-sided trading action but has been able to hold last week’s low at 1.3421. This may be an attempt to build a support base,

Technically, an uptrending Gann angle at 1.3425 is the true support this week. A break through this price and time angle could trigger a sharp break to the downside to 1.3285.

On the upside, minor resistance is the 61.8 percent level at 1.3566. This is followed by a downtrending Gann angle at 1.3607. The market would have to close above this angle to trigger a short-covering rally. Otherwise treat this angle as a possible selling point.

Economic news seems to be taking a backseat this week as the focus seems to be shifting toward sovereign debt ratings. After it was announced earlier in the week that the U.S. congressional super committee failed to reach a debt solution, credit agencies maintained their opinions on the sovereign debt of the U.S. Fitch Ratings, Standard & Poor’s and Moody’s all held their ratings unchanged.

Even though a sigh of relief was expressed on the news from the rating services, earlier in week on Monday day traders presented their opinions of the whole mess by selling off equity and commodity markets. Traders had been concerned that a failure by the debt committee would have meant another debt downgrade similar to the one the S&P Corp. expressed in August after the U.S. debt ceiling was raised.

Although the Euro is still holding above last week’s low, conditions could shift back to bearish rather quickly. The sovereign debt crisis is still a major concern. In addition, Moody’s on Monday warned that French debt could lose its triple-A rating. Increased borrowing costs and slowing growth are the main concerns. Since the U.S., Spain and Italy have already faced downgrades in the past, a cut of France’s rating, while it wouldn’t be a surprise, could create turmoil.

By late Tuesday traders were already looking forward to hearing more about the proposal from the International Monetary Fund to provide flexible funding for countries faces sovereign debt problems. The fact that the IMF is interested in providing financial aid could be a sign that it fears the worst for the Euro Zone. Although traders aren’t looking at it that way, there exists the possibility that it may become the lender of last resort if there is a sovereign debt or major bank default.

Factors Affecting the Euro this Week:

  • Economic News:  Traders aren’t watching economic reports this week because everything that is being reported is old news and likely to change moving forward especially since uncertainty continues to linger in the Euro Zone. The news that the IMF may help ailing EU members could mean the region avoids a recession. This positive development occurred late Tuesday and provided some support.
  • Yields:  Yields continue to rise in Spain. This is pushing up the cost of debt. The European Central Bank is trying to keep interest rates down by purchasing the sovereign debt of Spain and Italy. It seems to be gaining some control of bonds but Treasury bill rates continue to rise. The stabilization of yields will be a strong sign that conditions are improving. This will help firm the Euro.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.

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