Euro Tumbles after New Shorts Take Advantage of Rally

The EUR/USD rallied through a few layers of resistance early in the session after Cyprus agreed to the European Union’s bailout proposal. Some traders bought on the news, but shorts took advantage on the rally and refreshed their positions. This triggered a break back below 1.2900 and threatened to take out last week’s low at 1.2843.

The signing of the deal between Cypriot leaders and the EU temporarily lifted worries of a banking crisis, but bigger problems still lingered including the economic slowdown in the Euro Zone, political uncertainty in Italy and the possibility of additional stimulus from the European Central Bank.

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Today’s trading action and the erasing of all of the earlier gains sends a message that the U.S. Dollar is the best place to be right now especially because of the improving economy and because the Fed is moving closer to ending its quantitative easing program although no firm date has been set.

The GBP/USD continued to post mild gains. The current rally is carrying into its third week. Not only is a short-squeeze taking place, but recent data suggests the U.K. economy is on course for improvement. This news lessens the possibility of additional quantitative easing by the Bank of England which can lower the value of the currency. By refraining from additional stimulus, the Sterling is being allowed to reach a more realistic price level.

Technical analysis suggests that 1.5337 is a reasonable target. A lower close today, however, could trigger a retracement to 1.5045 before the market finds support.

A rebound in the U.S. Dollar sent April Gold plunging to a 50% price level at $1588.45. This move also made $1616.50 a new swing top. The main trend is down, but holding the 50% level suggests that buyers may still be present. A trade through $1616.50 will turn the main trend to up.

Investors should watch gold carefully because worry and uncertainty in Cyprus could spark a strong rally in gold. Weakness in the equity markets could also drive investors into gold.

May crude oil surged after the Cyrus deal was reached, but like the other dollar-sensitive markets is giving back some of its gains. The market rallied through last week’s high at $94.47 and spiked into a Fibonacci price level at $95.54 before finding resistance and attracting selling pressure. A close back below $94.44 could be a sign of a short-term top.

The supply and demand situation remains weak; however, today’s activity was related directly to the trading action in the Euro and the dollar. Improving conditions in the Euro Zone will help gold over the long-run, but until it sheds some of the negatives affecting the economy, a stronger dollar will keep the pressure on crude oil. 

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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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