EUR/USD Mid-Week Analysis for the Week of December 5, 2011

For the second consecutive week, the EUR USD is experiencing an inside trading week. Although trading can be tedious at times, this type of pattern is usually indicative of impending volatility.

The fact that the Euro has crossed over to the bullish side of a downtrending Gann angle at 1.3287 is a sign of a developing bias to the upside. If all works out at the European summit later in the week, this market may rally up to a major 50 percent price at 1.3729 or the next downtrending Gann angle at 1.3767. As long as the pair of bottoms holds at 1.3212 and 1.3145, this market will continue to have an upside bias. A failure to hold these levels will mean major problems for the Euro.

After a see-saw trade on Tuesday, the Euro firmed against the U.S. Dollar amid speculation that European leaders will agree to expand bailout funds available to the Euro Zone’s largest debtor nations at its summit meeting later in the week. The expected debate will be over whether to continue to fund short-term solutions to the sovereign debt crisis or combine these funds with a longer-term planned strategy.

Speculators reacted ahead of the summit to reports that European policy makers are ready and willing to take the next step in shoring up the Euro Zone’s debt problems. The real issues appear to be will they be able to resolve the debt crisis and will they be able to convince investors with clarity and conviction that it can be done.

On Tuesday, reports circulated that U.S. Treasury Secretary Geithner favored a German-French plan for tighter relationships between European nations. Given last week’s major step by the world’s central bank’s to provide liquidity to Europe, Geithner called for European policy makers to work closer with central banks to build a “stronger firewall” to resolve the crisis that is about to enter its third year.

While a European leaders attempt to build a solid foundation for their next step forward, the European Central Bank is expected to cut its benchmark interest rate to 1 percent on December 8th. This move along with continuing to provide the Euro Region with liquidity is expected to help ease the area as it prepares to enter a much anticipated recession.

The rest of the week is going to be tricky to trade at times because unconfirmed reports are likely to surface from time-to-time, driving the EUR USD in both directions. Technically there is a bias developing to the upside, but thin trading conditions caused by low volume have prevented the single-currency from moving higher. This situation is likely to be rectified when more concrete news comes out of the summit. Until then, it is suggested that traders continue to trade off of support and resistance until traders choose a more permanent direction or until a trend develops.

The news that the ECB is going to cut rates shouldn’t surprise traders so it isn’t likely to move the Euro significantly. If it does, it will probably trigger a slight rally because the action will be perceived by traders as a positive development in the campaign to get the Euro Zone back on track. Typically a rate cut fuels a bearish response.

Factors Affecting the Euro this Week:

  • European Summit:  This is the last meeting of the year for Euro leaders and traders are expecting a big finish. Too much talk and no action has been the theme this year and the global financial community is getting perturbed at the lack of a solid plan to combat the spread of the European sovereign debt crisis. Based on the somewhat firm tone this week, traders seem to be giving the EU leaders the benefit of the doubt so the ball is in their court to get a concrete executable plan completed by the end of the week.
  • Downgrades:  The S&P Corp. has served warnings to all involved that it is not going to tolerate anymore failures by the EU policymakers to reach a solution to the crisis. It stands ready to downgrade nations and banks should it continue to see the lack of progress.  

  • European Central Bank:  Look for the central bank to cut interest rates on December 8th and to provide more liquidity when and where needed. It may be a little more aggressive with the latter since it knows the other major central banks have its back. 

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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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