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

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Selling pressure is hitting the EUR/USD at the mid-session in reaction to the weaker-than-expectedU.S.jobs report. The disappointing report showed that the U.S. economy produced only 80,000 new jobs in June. This was below the estimated range of 92,000 to 100,000.

At first glance, one would have thought this meant the Fed would have to gear up for another round of quantitative easing, but the number was not that bad to warrant a policy shift at this time. Since this became the consensus, the U.S. Dollar rallied substantially against all major currencies, but the Euro felt the brunt of its strength. 

With traders shifting to the relative safety of the U.S. Dollar, higher risk assets had to take a hit so stocks and commodities weakened across the board. The Euro also went down because the strength of the dollar, but even if the stock market recovers, traders still expect the Euro to remain weak since now it will be perceived as the new funding currency. 

The action by the European Central Bank on Thursday to lower interest rates across the board was not only implemented to provide liquidity, but it was also designed to encourage banks to circulate money. This should translate into cheaper borrowing costs which will make the Euro the funding currency of choice, much like the Japanese Yen and U.S. Dollar have been for years. This means that when stocks and commodities are moving higher, the capital being applied to these asset classes will be coming from the Euro Zone. 

Daily EUR/USD Chart

Daily EUR/USD Chart

Technically, the EUR/USD remains bearish on all three major charts – monthly, weekly daily. Earlier this week, the Euro erased all of its gains from June 29, the day that European officials reached an agreement on how to handle the sovereign debt crisis. This could serve as a lack of confidence in the agreement. 

On Friday, the Euro took out its June 2012 bottom at 1.2287, setting it up for an eventual test of the June 2010 bottom at 1.1876. At this time there isn’t a panic in the market and the Euro is on a steady path, however, fresh negative news regarding Spain and Italy could accelerate the move to the downside. 

Currently, the best strategy is to follow the trend and to treat rallies as market noise. With the ECB warning of a weaker economy and the U.S. Dollar attracting the attention of traders, it doesn’t look like the EUR/USD will be in a position to change trend for a while. 

 

 

 

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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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