EUR/USD Still Vulnerable to Euro Zone Concerns

The EUR/USD rebounded after the Euro Zone final January purchasing-managers’ index came in above an earlier “flash estimate”. This news turned the Euro around versus the dollar after an early session sell-off.

Initially, the Euro followed through to the downside following Monday’s sharp corrective move. Technical and fundamental factors encouraged investors to shed the Euro yesterday following reports over the week-end that Spain’s Prime Minister Mariano Rajoy accepted secret payments. This raised some concerns in the Euro Zone especially after interest rates rose in Spain ahead of Thursday’s key debt auction.

The recent surge in the Euro encouraged French President Francois Hollande to voice his concern. He called for the European Union to establish a mechanism to prevent “irrational movements”. This remark is a strong indication that he is concerned about the rapid upward movement of the single currency and should’ve pressured the Euro. So today’s rally comes as a bit of a surprise.

Not much of a change in the fundamental picture affecting the British Pound today. Investors are still selling rallies in anticipation of additional quantitative easing later this month. The weakening U.K. economy and the real threat of another recession have investors worried that the Bank of England stands poised to renew its asset-buyback program. This aggressive approach tends to have a bearish influence on the market.

The recent sideways action in April Gold suggested volatility but the direction was unclear. Early in today’s session, the market attempted to breakout to the upside, but this move was thwarted. Investors still can’t seem to decide whether gold is an investment or a reserve currency.

The triangle chart pattern suggests that a breakout is imminent. A change in trend in the equity markets from up to down could drive some fresh money into the gold, triggering an upside breakout. Although the direction isn’t clear right now, the chart pattern suggests that we are nearing the start of a major breakout. It looks as if the next move will be determined by the direction of the U.S. Dollar and the equity markets.

Profit-taking helped drive April crude oil lower on Monday, but the lack of follow-through overnight caused a bit of a panic amongst the bears, encouraging short-covering. The main trend is up so the buying didn’t come as a surprise. What did surprise me was the price level of the turnaround. The $96.00 area is not a value zone for March crude oil so I don’t expect the rally to last. Since the latest rally started in late November near $86.00, serious investors would love to see a normal correction into the low-90’s before entering on the long-side. 

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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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