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The EUR/USD turned positive at the mid-session after trading lower for the fourth straight day. Sellers have been controlling the action in the Euro all week after a solid nine day rally. Today’s action suggests that perhaps they decided to pare their positions or book profits ahead of the week-end since there is no evidence of a shift in sentiment nor any breaking news.
The initial weakness in the Euro started this week when traders became concerned about the speed at which the European Central Bank and the U.S. Federal Reserve were moving toward implementing additional rounds of stimulus. Speculators believe that the ECB will eventually begin buying Spanish bonds, but only after Spain taps the European rescue fund. The central bank wants to have enough firepower behind it to make quantitative easing work in conjunction with its monetary policy decisions. The Fed is expected to act in September following its next meeting, but some traders believe it may act as soon as the Jackson Hole central bankers’ meeting on August 31.
The technical picture looks like this. The Euro is currently trading inside of two ranges. The short-term range is 1.2133 to 1.2443. This range has created a retracement zone at 1.2287 to 1.2251. The intermediate-term range is 1.2042 to 1.2443. The retracement zone of this range is 1.2242 to 1.2195. The combination of these two retracement zones created a support cluster between a Fibonacci level and a 50 percent level at 1.2251 and 1.2242 respectively. In gymnastic terms, the Euro nearly “stuck” the low of the day at 1.2241.
Profit-takers and perhaps buyers helped turn the market at this point, triggering a solid intraday reversal. Short-traders were likely encouraged to take profits from positions initiated earlier in the week because they were going against the uptrend on the daily chart. Buyers were looking for value since the main trend is up and their preference was to enter the market at a relatively reasonable price.
If mid-session prices stay the same into the close, it looks as if the Euro is going to finish the week near a balance point. This makes sense since some traders are still optimistic the ECB is going to soon begin purchasing Spanish bonds.
While the daily chart paints an optimistic view of the Euro, the intermediate-term weekly chart and the long-term monthly chart are still pointing decisively lower. This doesn’t mean that short-term traders should abandon the long side of the Euro, but that they should remain cautious about where they enter the market. Buying strength is not suggested at this time; however, if the buyers can begin to form a series of higher bottoms then perhaps they will be able to turn the tide on the weekly and monthly charts.
At this time, the key to higher prices is the establishment of a solid support base. The longer the Euro stays in a range on the daily chart, the more optimistic traders will become especially if the technical picture is support by clear, decisive action by the European Central Bank.