EUR/USD Mid-Session Analysis for July 24, 2012

After Monday’s short-covering rally failed to attract any follow-through buying, the EUR/USD turned and headed back down, erasing all of Monday’s gains and setting up the currency pair for further downside action.

Speculation Europe’s sovereign-debt crisis is worsening, driving up demand for safety and making the U.S. Dollar more attractive versus the Euro. Late Monday Moody’s Investors Service cut its outlook for Germany and the Netherlands raising concerns that the more prosperous European nations will have a difficult time supporting the weaker nations.

Interest rates continued to rise in Spain. The 10-year yield rose to 7.636 percent. This rate is considered unsustainable, meaning that the country will likely seek another bailout. We’ve now reached the point where it is getting too expensive to fund the debt that runs the country.

Reports that Greece has been missing financial austerity targets for reducing debts is raising concerns that European Central Bank and the International Monetary Fund official may decide to cut or restructure financial aid. The decision to put additional pressure on Greece could hasten its leaving the Euro Zone.

Furthermore, fresh talk is circulating the Spain is also considering leaving the Euro Zone. This could send shock waves through the global economy initially, but the region’s fourth largest economy should eventually regain its place.

The overall theme is bearish and traders are looking for further downside activity, this “bearish consensus” could be construed as a contrary indicator, meaning the Euro could be setting up for a quick reversal. Tuesday’s trade is slow with limited movement on low volume. This is a further indication that the market may be oversold and ripe for a reversal.

Conventional chart analysis indicates that the EUR/USD main trend is down and in no danger of turning up. The first level of resistance today is 1.2227. A trade through the swing top at 1.2324 will turn the main trend to up. Profit-taking and counter-trend buying could create some short-term demand for the Euro, but this is not likely to last since the overall fundamentals still support further price deterioration to 1.1876.