EUR/USD Forecast for the Week of Dec. 12th, 2011, Technical Analysis

The EUR/USD pair has been a focus of the markets for some time now. With the various debt issues in that region, it makes total sense. The headlines have been pushing the markets around lately, and many traders have been chopped up in this pair.

The EU summit came up with a band aid situation, and the UK even has decided not to participate going forward. The real questions loom as to whether or not the ratings agencies will downgrade the European Union countries because of the lack of a common bond and tighter fiscal union than the S&P actually wanted. The outlook for the EUR/USD is somewhat beholden to that issue now at the moment.

The resulting candle for the week is a doji, but closing lower than the open. The week did have at least some positive news coming out of Europe, but the reaction was muted. The lack of enthusiasm almost undoubtedly has to do with the fear of credit downgrades for the EU and its countries. If this comes about, we could see a real move to the downside in reaction. The S&P agency mentioned the fiscal union by name, and threatened to downgrade 15 of the countries in the union, as well as the EFSF bonds that are meant to bail everyone out. With this in the backdrop, there is a real chance that the Euro doesn’t move much, or even moves to the downside.

The 1.30 level continues to be massive support, and there has even been talk of Asian central banks buying at that level. The reality is that the level has been fiercely supportive. The breaking below that area would be massive in its scope, and would send this pair much lower. The resistance at the 1.40 level seems to be a cap in this market as well. In the near-term we think there are still massive headline risks ahead, and we think the longer-term direction is probably down, but choppy.