EUR/USD Rallies on Short-Covering, but Still Faces Headwinds

The Euro is trading nearly flat early Thursday as traders decide whether to chase the single-currency higher after yesterday’s impressive short-covering rally.

The common-currency rose sharply on Wednesday after the Federal Reserve raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years. Traders showed little reaction initially to the move since it had been priced in for weeks.

However, a strong short-covering rally was fueled after Federal Reserve Chairman Jerome Powell indicated that the central bank won’t get even more aggressive in raising rates.

“A 75-basis point increase is not something we’re actively considering,” Powell said. “I would say I think we have a good chance to have a soft or softish landing, or outcome if you will.”

At 02:59 GMT, the EUR/USD is trading 1.0623, down 0.0001 or -0.01%. On Wednesday, the Invesco CurrencyShares Euro Trust ETF (FXE) settled at $98.27, up $0.75 or +0.77%.

Shorts were spooked by Powell’s comments and the fact that the Fed did not deliver the shock and awe that many bearish traders had expected. Nonetheless, the rally was not as pronounced as the move by the Australian and New Zealand Dollars because no one is certain when the European Central Bank plans to raise rates to fight inflation. In those two countries, at least we know rates are going higher.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. However, momentum is trending higher. A trade through 1.0472 will signal a resumption of the downtrend. A move through 1.0936 will change the main trend to up.

The minor trend is up. It changed to up on Wednesday when buyers took out 1.0592. This move shifted momentum higher.

The short-term range is 1.0936 to 1.0472. Its retracement zone at 1.0704 to 1.0759 is the first upside target zone. Since the main trend is down, sellers are likely to return on the first test of this area.

Daily Swing Chart Technical Forecast

The direction of the EUR/USD on Thursday will be determined by trader reaction to a minor pivot at 1.0557.

Bullish Scenario

A sustained move over 1.0557 will indicate the presence of buyers. Taking out the intraday high at 1.0642 will indicate the buying is getting stronger. This could trigger a surge into the short-term retracement zone at 1.0704 to 1.0759.

Since the main trend is down, look for sellers on the first test of this area. They are going to try to form a potentially bearish secondary lower top. The buying is going to have to be strong enough to overtake 1.0759 in order to extend the rally.

Bearish Scenario

A sustained move under 1.0557 will signal the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into the main bottom at 1.0472. If this fails then look for a break into the January 3, 2017 main bottom at 1.0339.

Side Notes

Remember that following a prolonged move down in terms of price and time, the first rally is short-covering. After that move, the market usually pulls back 50% to .618 of the first rally. Trader reaction to that pullback zone will then determine the next major move. Countertrend buyers are either going to come in or sellers will retake the chart pattern.