Short-Covering Driving EUR/USD Higher

By FX Empire Analyst - James Hyerczyk
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  • Technical and fundamental factors contributed to a rise in the EUR/USD on Thursday. Technically, the market successfully tested a 50% price level at 1.2824. Selling pressure subsided when the currency pair reached this level, causing shorts to cover. One reason for the early session weakness was a downgrade of Spain’s debt rating to near-junk status.

    Since this move was largely expected, however, the market quickly reversed to the upside in a typical “sell the rumor, buy the fact” situation. The ensuing short-covering rally helped the Euro recover much of its four-day loss against the U.S. Dollar. One catalyst for the short-covering rally was the idea that the ratings downgrade would prompt Spain to finally make a formal request for financial aid from the European Central Bank.

    Another reason for the sharp rise in the Euro was increased demand for higher risk assets. Overnight, Asia began to bid up equity markets. This action spread overnight to Europe, prompting a shift in investor sentiment. The news that U.S. weekly jobless claims fell to their lowest level in four years while its trade deficit widened also triggered new demand for risky assets. The improvement in jobless claims is further evidence that the U.S. jobs market is improving.  On the negative side, however, the Commerce Department said the trade deficit increased to $44.2 billion in August. A wider trade deficit tends to hurt growth because it means the U.S. is earning less on overseas sales of American-produced goods while spending more on foreign products.

    The mixed fundamental news is adding to the confusion in the market which typically means traders should prepare for a volatile two-sided trade.

    The lack of fresh economic news out of the U.K. gave traders little choice but to follow the direction of the Euro and the U.S. Dollar. Greater demand for risky assets helped to boost the Euro which meant British Pound traders would react in similar fashion. The weaker U.S. Dollar also gave the Sterling a boost. Technical factors also played a role in the strength of the GBP/USD. Since topping at 1.6309 on September 21, the British Pound has fallen considerably against the U.S. Dollar in a series of lower-tops and lower-bottoms. This type of trading action usually indicates the presence of institutional selling.

    The weaker U.S. Dollar is also giving December gold futures a boost after declining for several days. Gold is still in a well-defined uptrend, but the lack of buying interest near $1800.00 has encouraged long-traders to pare their holdings in the hopes of better prices. Gold completed a 50% retracement of its recent range at $1768.20, attracting some fresh buying. The low near $1765.00 could become a bottom if momentum returns to the market. Uncertainty in Europe and the desire for value could keep a lid on prices over the near-term.

    December crude oil is making a comeback today after Wednesday’s reversal top. Speculators continue to support the market on breaks in anticipation of an escalation of the conflict between Syria and Turkey. The supply/demand situation continues to paint a bearish picture for the true fundamentalists, but oversold conditions and a potentially bullish story should continue to attract speculative buyers. A disruption in crude oil supply is one of the strongest drivers of higher prices.


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