EUR/USD Mid-Session Analysis for July 30, 2012

The EUR/USD has given back almost half of last week’s gains as shorts regained control of the market and speculators who caught last week’s rally pared their positions.

Technically, the Euro stopped short of completing a 50% retracement to 1.2294 last week, stopping at 1.2389. The subsequent break has triggered a near 50% retracement of the short-term rally from 1.2042 to 1.2389. This key level is 1.2215. Additional support is at an uptrending Gann angle at 1.2202. The 1.2215 to 1.2202 combination forms a support cluster and possible downside target today.

Daily EUR/USD Chart

After today’s initial sell-off, trading volume has dropped off as traders prepared for Thursday, European Central Bank meeting. The consensus is for the ECB to leave its benchmark interest rate at 0.75% after slashing its key rates at the last meeting in early July. Today’s debate is over last week’s comments by ECB President Mario Draghi.

Last week ECB President Mario Draghi fueled a surge in the EUR/USD that caught short traders by surprise and changed the main trend to up on the daily chart when the market crossed 1.2324. The sudden shift in sentiment was triggered after Draghi vowed “to do whatever it takes to preserve the Euro.”

Critics helped weaken the Euro today on two fronts. Firstly, a negative comment from German spokesman Georg Streiter drove the Euro lower after he reiterated Germany’s stance to keep Greece in the Euro Zone while balking at the issuance of joint Eurobonds.

Secondly, a free Democratic Party spokesman expressed his discomfort with ECB debt buying. He even suggested suing the central bank over bond purchases. His comments focused on Chancellor Angela Merkel’s support of Draghi’s expected proposal to develop a bond purchasing plan. His main objection was using the ECB and the rescue fund as lenders.

Finally, adding further to today’s weakness in the Euro was the news that Spain’s economy contracted once again last quarter. Current estimates show a 0.4% decline. This follows a 0.3% decline in gross domestic product during the first quarter.

Today’s action demonstrates just how fragile the Euro has become. While last week’s rally was impressive in terms of price movement, today’s action serves as proof that short traders are still controlling the direction of the market. Unless there is a solid support base build by bona fide buyers, all rallies are likely to be sold. Although the daily chart did change trend last week, the lack of follow-through to the upside on the weekly chart suggests this market is a long way off from putting in a real bottom.