Euro Rally Fizzles on New Concerns

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There is a general easing in higher risk assets across the board today, led by a slight decline in the EUR/USD. Last week European Central Bank President Mario Draghi fueled a strong short-covering rally in the Euro after he vowed to do everything in his power to prevent a collapse in the Euro Zone. His comments were strong enough to encourage weak shorts to abandon their positions, but did not contain the firepower to cause a massive buying spree. Those who did buy the momentum are now facing exposure to a short-term correction.

Last week’s gains are being pared by negative talk out of German along with weak European economic data. Both serve as reminders that the Euro Zone is still facing a mountain of problems. The first negative comment came from German spokesman Georg Streiter who reiterated Germany’s stance that it wants to keep Greece in the Euro Zone but is still against issuing joint Eurobonds to do so.

Additionally, a free Democratic Party spokesman expressed his discomfort with ECB debt buying. He even suggested suing the central bank over bond purchases. Finally, some were criticizing Chancellor Angela Merkel’s support of Draghi’s expected proposal to develop a bond purchasing plan since it entails the purchase by both the ECB and the EFSF rescue fund.

Adding further to today’s weakness in the Euro was the news that Spain’s economy contracted once again last quarter. Current estimates show a 0.4% decline. This follows a 0.3% decline in gross domestic product during the first quarter.

After this week’s initial weakness, expectations are for the Euro to settle into a trading range ahead of Thursday’s European Central Bank monetary policy committee meeting. Traders are looking for the ECB to stand pat on interest rates this time around as it gives time for last month’s interest rate cut to take hold.

Technically, the EUR/USD is retracing last week’s range of 1.2042 to 1.2389. The first downside target is the retracement zone at 1.2215 to 1.2175. Additional Gann angle support is at 1.2202.

The GBP/USD is trading slightly weaker this morning, driven lower by the shedding of risky assets and the belief that the Bank of England will take further action to boost the ailing economy. The short-term range of 1.5458 to 1.5767 suggests the Sterling is set-up for a near-term retracement to 1.5613 – 1.5576.

The stronger U.S. Dollar is pressuring December Gold today despite last week’s impressive upside breakout. Last week’s rally was a combination of a bullish technical chart pattern and a sell-off in the Greenback. Although the move may be signaling higher markets to follow, it is not likely to occur unless the Dollar finally tops. Otherwise Gold is vulnerable to the same retracements facing the Euro and the British Pound after their strong rallies last week. Based on the short-term range of $1566.80 to $1633.30, traders should be prepared for a pull-back to $1600.05 to $1592.20.

Although the main trend is up in September Crude Oil, today’s trading action suggests the market is weakening. Concern over lower demand because of a weakening global economy is one reason for today’s decline. The second reason is the abundance of supply. Technically, a trade through $89.25 could trigger an acceleration to the downside. Speculation that supply problems may flare-up because of tensions between the U.S. and Iran may be slowing down the rate of the decline.

Look for sideways-to-lower trading the rest of the day in the Euro as traders pare positions ahead of Thursday’s ECB meeting. The GBP/USD, crude oil and gold are likely to take their cues from the movement of the Euro. 

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About:FX Empire Analyst - 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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