EUR USD Balanced but Poised to Make Its Move

The EUR USD begins the week straddling the 50% level of the 1.4549 to 1.3145 range. This price is 1.3847. Expectations are for this price to act as a pivot with the market likely to gain strength if support can be established at this level.

One of the first signs of strength this week will be a breakout above the downtrending Gann angle at 1.3909. If this occurs then the Euro will have a clear shot at reaching the 61.8% level at 1.4013. Traders will once again be asked to buy strength at this retracement level in order to drive the market into another downtrending Gann angle at 1.4229.

On the downside, a failure to hold the 50% level is likely to lead to renewed selling pressure. The first downside objective will be the steep uptrending Gann angle at 1.3785.  A failure to hold this angle will indicate that further selling pressure can be expected with 1.3580 the next likely objective.

The fact that the EUR USD has traded sideways since forming a daily reversal top last week at 1.3914 should not be ignored. This rangebound trading typically indicates impending volatility. At this time the direction is uncertain, however, given the recent compression of the trading ranges, once the market makes its breakout move, it is likely to be spectacular.

This ties in nicely with the anticipation of a plan to address the region’s debt and banking crisis. Traders are expecting a bold move by the European Union leaders and the longer they take to reach a decision, the more pent up traders will become. Although the Sunday deadline for an agreement has passed, European leaders have promised a plan will be in order no later than Wednesday. For volatility and momentum traders, the longer the Euro stays in a range the stronger the breakout is likely to be.

Since all parties are still talking and no one has walked away from the negotiating table, one has to anticipate bullish news. The fact that the EUR USD is still holding near the upper-end of its three week range could be a sign that a large bidder is holding up the market. If a breakout occurs to the upside, then look for both short-covering and fresh buyers to drive it higher. The scenario for a breakout to the upside has been set. Now all traders want is some confirmation. If Wednesday is the new deadline, then the market may continue to trade sideways for another three days. If Wednesday comes and nothing is accomplished then it is likely that the support will begin to weaken.

While waiting for the news from the Summit the markets have become relatively calm. To some this may mean the return of confidence, however, most agree that the uncertainly behind the agreement is the main reason why traders have not assumed normal trading activity. Going home last week, many traders were left with trying to decide if the conflict between Germany and France over the role of the European Financial Stability Facility would escalate. The more time that passes without an agreement, the more traders are going to wonder if the conflict between the two powerhouses has become a deal breaker. This is the news that could trigger a fresh wave of selling pressure.

At this time it appears that EU officials have figured out that if they remain quiet and stick to the agenda then the financial markets will remain calm. Continually making deadlines then letting them lapse is not the way to instill confidence in investors, however. Over the next two days traders should expect news leaks and rumors to set the tone of the markets. As Wednesday approaches, however, volatility is expected to increase and traders will be willing to react either way. The fact that the market is trading at a 50% level means that the bulls and bears are balanced, but by Wednesday traders should expect something to happen that will upset this balance.