EURO DOLLAR (EUR/USD) Mid-Session Update for December 11, 2012

Greater demand for higher-yielding assets and the possibility of an extension of the Fed’s Operation Twist program led to a surge in the EUR/USD early in the trading session. At the mid-session, the Forex pair is holding on to its gains and even extending the move. 

The ability to hold a major 50% retracement of the mid-November to early December range of 1.2660 to 1.3126  is one of the reasons for the strong rally. The target price was 1.2893 with the actual low coming in at 1.2876. Monday’s inside day suggested impending volatility and the potential for a breakout. Traders have been accommodating today with the market able to catch a bid after breaking out over 1.2946.

Based on the short-term range of 1.3126 to 1.2876, expectations are for the market to test a retracement zone at 1.3001 to 1.3030. A test of this zone is necessary to assess the market’s current position. If the market stops in this zone then it will be a strong sign that sellers are taking control. The inability to rise above the 50 and 61.8 percent retracement levels could lead to the formation of a secondary lower-top and the start of the next leg down. 

The next sign that a bullish move is taking place will be the expansion of the rally through the retracement zone. This move will lead to a test of a downtrending resistance angle at 1.3046. A breakout above this angle could lead to a test of 1.3086. 

If the rally fails today inside of the resistance zone at 1.3001 to 1.3030, traders should watch for a short-term break into 1.2939.