EUR/USD Mid-Session Analysis for August 6, 2012

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The EUR/USD surged to the upside overnight, changing the main trend to up on the daily chart and crossing over to the bullish side of a few technical points. Bullish traders are driving the market higher in a move that began early Thursday after European Central Bank President Mario Draghi’s press conference and continued after Friday’s surprisingly friendly U.S. Non-Farm Payrolls report.

Today’s action is significant for two reasons. Firstly, it likely means that market participants finally understand what Draghi’s press conference comments were all about. At first traders reacted swiftly by exiting long positions and refreshing old shorts because they thought the European leader had failed to support his pledge from the week before. About a week prior to the ECB meeting on August 2, Draghi vowed to do ‘whatever it takes” to preserve the Euro.

Since Draghi did not offer a decisive plan on how he planned to accomplish his pledge, traders reacted as if he had failed to deliver. Now it appears that traders understand that a few factors had to be in place before the ECB would renew its bond purchasing program. Speculators now believe that Spain is going to be the first country to tap the rescue fund. This action would shore up Spain’s economy while giving the ECB’s bond purchasing program a chance to drive interest rates lower.

Daily EUR/USD Chart

Daily EUR/USD Chart

Secondly, today’s trading action is also suggesting that a number of shorts may have been driven out of the market due to the recent volatility. This could dampen upside movement but it could also be indicating that sentiment is shifting to the buy side.

Technically, crossing to the bullish side of a 50% price level at 1.2394 and a downtrending Gann angle at 1.2397 are both signs of strength and higher markets to follow. Holding above an uptrending Gann angle at 1.2402 will also be a strong indication that buyers are taking control.

Upside momentum could continue to 1.2478, but if the market breaks back below 1.2394, downside pressure could begin to mount. If there is another wash-out to the downside, 1.2242 to 1.2195 could become a key support zone.

Overall, there appears to be a bullish tone developing in the market triggered by possible ECB intervention and additional Federal Reserve intervention. Speculative buying is driving the market higher so if one or more of these factors is taken off the table, the Euro could be set up for a hard break. On the upside, with the majority of the shorts out of the way, the EUR/USD could grind higher over the near-term.

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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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