EUR/USD Technicals – Uptrend Intact but faces Strong Headwinds

EUR/USD has been in a very strong bullish rally this week, with the past 4 trading days forming higher highs and higher lows, with the new lows nicely supported by the previous day’s consolidation zone. After breaking out of the Kumo back on Monday, subsequent dips have failed to break the Kumo, with price bouncing from the Kumo on 3 consecutive occasion. Price has also rebounded off the ascending trendline which has been in play since 29th May, making it 3 for 3 in terms of show of bullish strength.

Hourly Chart

If past trends is any indication of future movements, then the possibility of price forging new highs for today is high. However, it is worth noting that current rebound is not exactly a replica of previous rebounds – For the past 3 days, EUR/USD managed to break the previous day’s consolidation during Midday US trade, while price has failed to test Jun 13th’s high with current rebound. This suggest that the bullish momentum this time round may not be as strong as before, putting doubts to today’s ability to forge new weekly highs.

This is not surprising, as Friday price actions tended to counter intra-week trend due to the fact that traders who have a profitability week may wish to close out their positions and not risk Monday’s gap. In fact, to have the weekly high ending on Friday is generally more rare, and there are usually strong fundamental reasons that occurred on Friday to have this phenomenal. Looking at our economic docket today, there isn’t anything significant other than Euro-Zone CPI and U.of Michigan Confidence Index – which do not inspire strong movements generally. The only fundamental bullish impetus that can send price higher therefore is likely to come from USD movement from US Stocks reaction. USD is continuing the negative correlation behavior with Stocks which has been in play since the end of May. If US stocks continue to rally today, further USD weakness may allow EUR/USD to push higher.

Weekly Chart

Weekly Chart shows a strong bearish trend from April 2011 highs that is still in play since 1.35 resistance is still intact (for now). However the recovery rally from July 2012 could be at play as well, as price has managed to find support around 1.28, with Ichimoku Kumo supporting the decline, forming a double bottom pattern. Price will need to break 1.35 and preferably above 2013 Highs in order for a confirmation and extension of the bullish recovery, which would help to negate the bearish pressure from 2011 decline. However, in order to do this, we need to see continued weakening of USD and a resurgence of EU economic strength.

Looking at recent data, the resurgence of EU economic strength may not happen in 2013. Various EU countries have been slashing their own forecast – Germany inclusive – and together with IMF, World Bank and ECB’s own downgrades, paints a very bearish picture for EU both in 2013 and 2014. Various leaders have tried to boost morale by saying that growth will return in 2014, but that was exactly what they said about this year back in 2012, and the same applies back in 2010. Furthermore, the core issues surrounding the financial weakness of EU countries are still not resolved, but things are simply blowing over due to media disinterest for the time being – something that is highly similar to the “Grand Bargain” and “Sequesters” of USA. The problem is still there, just that nobody is talking about it. Should such issues surface back again, it is likely EUR will continue to fall once again. The same applies for US markets – if Obama fails to resolve the budget issues fully, it is probable that US stocks will fall – which will result in further USD gain if the negative correlation remains in play. Both factors point to a lower EUR/USD and taints current bullish recovery.

More Links:
GBP/USD – Almost Unchanged as US Posts Solid Data
USD/CAD – Lower as Key US Numbers Impress Markets
AUD/USD – Sharp Gains after Solid Aussie Employment Numbers

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