Euro/dollar had everything working int its favor and enjoyed a very impressive rally. The German court approved the ESM, Bernanke delivered QE3 and even the Dutch elections resulted in a strong outcome for pro-European parties. Are we set for a continuation or for a correction after 1.30 was conquered? Here is an outlook for the upcoming events and an updated technical analysis for EUR/USD.
While the constitutional court in Karlsruhe set a few conditions, it generally gave its nod to the ESM, which was finally ratified by the German president. All the balls are in the Spanish court, but with already lower yields and internal tension, the Spanish government is hesitant. In the US, Bernanke went for aggressive monetary policy: open ended QE worth $40 billion a month, in addition to ongoing Operation Twist and an extension of the pledge for lower rates until 2015.
EUR/USD daily graph with support and resistance lines on it. Click to enlarge:
* All times are GMT
EUR/USD Technical Analysis
Technical lines from top to bottom:
We start from even higher ground this time: 1.3615 provided support to the pair when it was trading at elevated levels back in the fall of 2011. 1.3550 served as a cap at that same period of time.
1.3480 is very important resistance: it was the peak seen in February. At the time, it was very stubborn. 1.3437 is of historic significant and is a minor line now.
The round level of 1.34 is a strong cap after serving as such during March. 1.3290 worked as resistance for the pair during April and is also of importance.
The round number of 1.32 also served as resistance at that time and is minor resistance. 1.3105 provided some support in April and is a weak line at the moment. 1.3060, was a clear separator in May and also had an important role beforehand. It slowed the rally in September 2012.
The very round 1.30 line was a tough line of resistance for the September rally. In addition to being a round number, it also served as strong support. It is closely followed by 1.2960 which provided some support at the beginning of the year.
1.29 is also notable after providing some support in May. 1.2814 was the peak of a recovery attempt in May and also capped the pair in September 2012.
1.2750 capped the pair after the Greek elections and also had a similar role in the past. It is weaker now. 1.2670 was a double bottom during January and was the high line of the recovery before the Greek elections in June. It also capped the pair at the beginning of July 2012.
1.2624 is the previous 2012 low and remains important as also seen at the end of August, when it served as resistance. Below, 1.2587 is a clear bottom on the weekly charts but after holding the pair down for a while, but it is weak now.
Long Term Downtrend Resistance Broken
The line starting from February at the 1.3486 peak was formed in March and April. The recent rally sent the pair surging through this level, as the graph shows. The break of this level is a positive sign for the bulls.
I am neutral on EUR/USD
With the European issues gradually improving, and with a devaluation of the dollar, what can stop the pair? A formal request from Spain is still needed, as its issues become more complicated, Greece’s issues are still very serious and also the value of the euro isn’t exactly favorable to the pair.
It’s also important to remember that US weakness, seen in yet another recession call, can eventually boost the dollar in classic risk aversion. In addition, a violent correction after such a rally cannot be ruled out, at least in the short term.
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