EUR/USD Mid-Session Analysis for August 31, 2012

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The EUR/USD surged to the upside as speculators interpreted U.S. Federal Reserve Chairman Bernanke’s comments to mean that there will be additional quantitative easing although he failed to pinpoint a date. Bernanke expressed his disappointment in the U.S. jobs market as one of the main reasons the economy needs a boost, but also left open a large window for the central bank to take action. As it stands, the Fed may act sometime between mid-September and mid-December. None-the-less the story is out there so it should continue to underpin the market.

Now that Bernanke’s speech is out of the way, the focus shifts on China’s central bank and the European Central Bank. Both are expected to be more specific in their moves to stimulate their economies. Next week the ECB meets to discuss monetary policy. Speculation is building that the central bank will finally announce formally its plan to purchase the bonds of Spain and Italy. This plan which has been in the works since late July when ECB President Mario Draghi vowed to support the Euro is expected to include other peripheral nations besides Spain and Italy.

Intraday EUR/USD Chart

Intraday EUR/USD Chart

If traders plan the waiting game next week like they did this week, then the Euro may trade in a tight range for most of the week until September 6 when volatility should increase. On Friday, EUR/USD traders did not wait for Bernanke to begin his speech before taking the currency pair higher. Overnight the market took off from 1.2493 and rallied virtually straight up to 1.2627. It was almost as if the call for additional quantitative easing was already being baked into the prices.

Shortly before Bernanke’s speech, the EUR broke against the Dollar as traders took profits and pared positions following the earlier rally. The speech began when the Euro was trading 1.2564 and quickly surged to 1.2637 on the intraday charts before selling off the rest of the afternoon into the close.

Friday’s price action reaffirmed the daily uptrend when the EUR/USD traded through 1.2589. The action also helped form a new swing bottom at 1.2465. The trend is decisively higher, but a trade through the swing bottom will turn the main trend to down.

In addition to the bullish action on the intraday and daily charts, the EUR/USD also finished on the bullish side of three downtrending trend lines on the weekly chart. One of these trend lines goes back to October 2011, so the strong close is significant to the longer-term structure of the Euro. Based on the market’s position, traders could try to test the June top at 1.2747 early next week. If this price is violated then the main trend will turn up on the weekly chart. 

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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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