EUR/USD Mid-Session Analysis for August 2, 2012

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What a difference a week makes. Last week European Central Bank President Mario Draghi provided a lift to the Euro when he stated he would do “whatever it takes” to preserve the Euro. Traders became optimistic that something was in the works that would prevent a disaster from unfolding in the Euro Zone, turning the main trend to up on the daily charts by shocking some of the weaker short traders out of the market.

The longer-term charts still indicated a steep downtrend, but it appeared that these charts would eventually fall as expectations were building that the central bank may have finally gotten it right and were ready to implement fresh stimulus into the system in the form of aggressive bond purchases. Everything sounded great on paper, but over the week-end skepticism grew that Draghi may not be able to deliver on his promise.

After the European Central Bank announced it had left interest rates unchanged, Draghi said in his press conference that the central bank is ready to intervene in the bond market to drive down in interest rates in a few of the struggling countries. Over the past week, a consensus developed that the ECB would begin its attack on high interest rates in Spain and Italy. Draghi’s comment served as a warning to European leaders to get their rescue fund in order to be available for a joint intervention.

Today, Draghi also said that the bank could begin buying bonds if rates continued to rise in Spain and Italy. His primary concern was that these high rates were hurting the central bank’s efforts to maintain low interest rates across the Euro Region. This strategy was designed to prevent a financial disaster as Draghi emphasized that the central bank “may undertake outright open market operations of a size adequate to reach its objective.”

The problem with his comments is the market was looking for something more decisive from the Euro leader. By telling traders that he planned no immediate action and that the situation would be addressed “over the coming weeks”, Draghi muted the upside momentum that appeared to be ready to drive the Euro higher.

As he spoke, the EUR/USD went on a wild ride, first buoyed by speculation that the European Central Bank would begin some form of quantitative easing and then crushed when the ECB leader failed to confirm the thoughts of speculators.

Daily EUR/USD Chart

Daily EUR/USD Chart

Technically, the EUR/USD surged to the upside, taking out the previous top at 1.2389, but slammed into a 50% retracement level that stopped the rally cold. The subsequent turnaround in the market took out the previous bottom at 1.2336, turning the main trend to down. After taking out this bottom and another 50% price level at 1.2215, the market broke into a Fibonacci price level at 1.2175 and an uptrending Gann angle at 1.2182.

The charts now indicate that the trend has shifted back down. Additionally, the current chart pattern suggests that a violation of the support zone at 1.2182 to 1.2175 could trigger an acceleration to the downside. 

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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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