EUR USD – February 2012 Outlook

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The EUR USD closed February by posting a monthly closing price reversal bottom. This chart pattern has the potential to launch the start of a 2 to 3 month rally equal to at least 50 percent of the last break. The key is the follow-through rally this month. Without it, the pattern will not be confirmed and the market will likely retest the January low. 

In order to start the launch sequence the Euro has to trade through last month’s high at 1.3233. A trade through this level is expected to trigger further short-covering and additional buying as traders will gain confidence that a major bottom has been formed. In January the Euro bottomed on an uptrending Gann angle at 1.2636. This month the angle moves up to 1.2676. This angle is the key support this month. 

Even if the market does confirm the closing price reversal bottom, the market will not have a clear shot at the 50 percent retracement level. It will first have to take out a resistance cluster formed by an uptrending Gann angle and a downtrending Gann angle. These angles form an “x” this month at 1.3476 and 1.3500 respectively. 

If upside momentum builds as expected and the previously mentioned resistance cluster can be overcome then traders should look for a test of 50 percent of the main range 1.4940 to 1.2623. This key price level is 1.3781. Further buying power may even drive the market into a Fibonacci price level at 1.4055. 

The bottom was formed in the Euro in January after a series of events encouraged bearish traders to curtail their selling pressure and weak shorts to cover their positions. As the rally progressed, larger traders most likely pared their open short positions, but for the most part they maintained their bearish posture. The recent Commodity Futures Trading Commission Commitment of Traders Report showed that shorts still maintain a large position and appear to be in control of the Euro’s long-term direction. 

One event that helped form the bottom in the Euro was the European Central Bank’s decision to leave interest rates unchanged at 1.00 percent. This was against most analyst forecasts and helped trigger the start of a strong short-covering rally. Most of the selling pressure witnessed earlier in the month can be attributed to the notion that traders believed the Euro Zone was headed toward a recession and perhaps a financial calamity.

The fact that the central bank held rates steady and ECB President Draghi was able to stabilize the market with his positive rhetoric also contributed heavily to the bottoming action in the Euro. 

Also taking place while the ECB was busy stabilizing the European financial markets was an important Italian bond auction. Demand was better than expected which was a sign that investor sentiment may be turning a little more optimistic. With interest rates stabilizing for the time being, short Euro traders seized the opportunity to take profits, helping the market to bottom. 

For the first few weeks of the month, rumors swirled that the major debt rating services were poised to announce downgrades of several European sovereign nations. This was also a major contributor to the rapid decline the Euro experienced in early January. When the news came out on January 13 thatFrancewas downgraded, traders reacted by selling the Euro. When the dust cleared that day, the market had recovered from the breakdown as traders seemed to realize that this event had already been priced into the market. This proved to be the final contributing factor to Euro’s bottom. 

Shortly after bottoming, the Euro began to rally on the news that the European Union and Greece were getting close to finalizing its debt structure plan. As the two parties negotiated, optimism increased that a solution would be found soon. As of the end of the month, however, nothing concrete was in place, but the parties were still talking. Since talks between the EU and Greece have been ongoing for several months, it’s a coin-toss as to whether the market will react positively to the announcement of a deal. If anything, there is likely to be a fast short-covering rally and traders will move on to the problems in Italy and Spain. 

The final leg in the Euro’s rally in January was triggered by the U.S. Federal Reserve’s announcement that interest rates would remain at historically low levels until late 2014. This greenlit demand for higher risk assets and crushed the U.S. Dollar. At month’s end the Euro rally was showing signs of running out of steam on the heels of weakerU.S.economic data. 

Entering February traders have two choices. They can either start the month with selling pressure that may retrace 50 percent of the January rally or even further, or they can take out last month’s high at 1.3233 and trigger another rally into the major retracement zone at 1.3781 to 1.4055. The chart picture has been laid out clearly, but the number of traders still pressing the market indicates that the Euro is still under the control of the short traders. It seems like it is going to take an event or a series of events to get this market rolling to the upside once again.

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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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