Members login
Euro Won't Be Denied; The Trend is More Than Your Friend
Written by article default Wednesday, 13 October 2010 08:19
Any hopes for the Euro to break a dramatic bullish sequence of consecutive daily closes above the previous daily low, were dashed into the latter half of the day on Tuesday, with the release of the FOMC Minutes sealing the deal, after the Minutes all but confirmed the degree to which the Fed was considering the implementation of a second round of quantitative easing. Many cited a language that seemed to suggest an across the board open-mindedness from the members, while others cited the notion that the Fed was considering new ways of looking at monetary policy, possibly targeting the level of nominal GDP.
In the end, the Euro closed higher on the day, and well above Monday’s low, with the market now likely eyeing a retest and break above the recent multi-day highs by 1.4030. The next medium-term target for the pair comes in towards 1.4500, in the form of a major falling trend-line off of the record highs from 2008, and while we certainly see a test of this trend-line as a very real possibility, we continue to struggle with the idea that this trend-line will be tested over the coming days. Daily technical readings are simply so overbought that a meaningful short-term corrective pullback is warranted before seeing a bullish resumption, and with QE2 so priced-in to the markets, we feel the risks over the short-term are more tilted to the downside in the Euro.
Nevertheless, as much as we would like to see this reversal, we keep reminding that a close below the previous daily low will be required to officially confirm a shift in the structure, with the market having already put in an overwhelming 25 consecutive daily closes above the previous daily low. For now, the critical level comes in by 1.3775 (Tuesday’s low), and we highly doubt that the market will manage a close below this level on Wednesday. Perhaps the reversal in this trend will come down to Friday, when all eyes will be on Fed Chair Bernanke, who is slated to speak on the topic of monetary policy, and will offer a more updated outlook on this matter (note that Bernanke is slated to speak later today but on the topic of business innovation).
Until then, we should expect to see more broad based currency gains against the buck, with the Yen and Swissie at risk for fresh record lows, the Australian Dollar contemplating a break above parity, and Euro attempting to establish above 1.4000. Buying USDs in the current market environment continues to be an exercise in futility, and the trend is clearly more than your friend and no friend to the Dollar right now.
On the data front, China’s trade balance came in lower than expected, while Japanese core machinery orders surprised. Meanwhile it was a tale of diverging consumer confidence readings, with UK confidence dropping while Australian confidence was better than forecast.
Looking ahead, Swiss producer prices (0.1% expected) are due at 7:15GMT, followed by UK employment data (4.5k expected) at 8:30GMT. Eurozone industrial production (0.8% expected) caps things off at 9:00GMT. US equity futures trade flat into the European open, while commodities are moderately bid, with gold considering a break to fresh record highs.
Click here to learn more about DailyFX.