EUR/USD Forex Technical Analysis – Strong Short-Covering Rally Fueled by Profit-Taking

The Euro is trading higher against the U.S. Dollar at the mid-session on Wednesday as traders took profits and shorts covered, following the release of the stronger-than-expected U.S. consumer inflation report. The price action more-or-less reflects the fact that most of the high inflation news was already priced in so we’re likely looking at a “sell the rumor, buy the fact.”

Furthermore, although the news is bearish for the Euro, professional may not want to sell weakness, but rather following a rebound rally. Additionally, some aggressive counter-trend buyers may be defending parity.

At 16:02 GMT, the EUR/USD is trading 1.0077, up 0.0041 or +0.41%. The Invesco CurrencyShares Euro Trust ETF (FXE) is at $93.31, up $0.53 or +0.57%.

Currently, the EUR/USD is in a position to post a potentially bullish closing price reversal bottom, if confirmed, we could see the start of a 2 to 3 day counter-trend rally. The move won’t change the trend, but it will alleviate some of the downside pressure.

With the main trend down, bearish traders will be looking for a fresh opportunity to re-establish short positions. In my opinion, we’re in “sell the rally” mode.

Short-Term Outlook

Trader reaction to 1.0037 is likely to determine the direction of the EUR/USD into the close on Wednesday.

Bullish Scenario

A sustained move over 1.0037 will indicate the presence of aggressive counter-trend buyers. If this move is able to create enough near-term momentum, we could see a 2 to 3 day rally into the nearest minor pivot at 1.0307.

Bearish Scenario

A sustained move under 1.0036 will signal the presence of sellers. Taking out the intraday low at .9998 will indicate the selling pressure is getting stronger. This could trigger an acceleration to the downside with the next target the December 2, 2002 main bottom at .9860.

Side Notes

Due to the prolonged move down in terms of price and time, a close over 1.0037 will form a closing price reversal bottom. If the chart pattern is confirmed on Monday then look for the start of a 2 to 3 day counter-trend rally with 1.0307 the next potential upside target. Look for sellers to return following a test of this level.