Overbought Conditions Could Pressure Euro

The EUR/USD finished lower on Thursday ahead of the European Central Bank policy meeting. Today’s weakness was a follow-through break in response to Wednesday’s sell-off that was triggered by a weak Spanish debt auction.

Traders expect the ECB to leave its benchmark interest rate unchanged and to take a wait-and-see approach on any other policy changes. Although yesterday’s weakness was largely attributable to the Spanish debt news, overbought conditions may have also given long traders an excuse to pare their positions.

The closing price reversal top pattern typically leads to the start of a 2 to 3 day break equal to 50% of the recent rally. If this current pattern begins to attract the attention of bearish traders, we may be looking at a possible break into a retracement zone at 1.2893 to 1.2838.

The GBP/USD traded flat-to-lower but expectations are for the Sterling to mount a strong rebound after the Bank of England decided to refrain from any additional bond buybacks. Downside pressure was beginning to build after recent economic reports and comments from government officials suggested the U.K. economy was poised for another recession. This would have also meant the central bank would have had to provide more stimuli to get the economy moving.

Shorts are covering this morning in response to the BoE’s announcement, adding some confusion to the market. Because of the surprise news, bearish traders who took short positions in response to a technical closing price reversal top earlier in the week, are now being forced to scramble for the exits.

February gold traded slightly lower on Thursday. Oversold conditions have made the market ripe for a technical bounce, but volume has been low and buyers have been scarce. Traders who treat the market as a reserve currency have backed away from the long side. Investors continue to prefer the Euro and equities to gold. Should the U.S. Dollar drop sharply because of concerns over the U.S. fiscal cliff then money may flow back into gold.

January crude oil traded range bound. The new range is $85.36 to $90.33 with a pivot price at $87.85. The possibility of a U.S. recession in early 2013 triggered by higher taxes and spending cuts is keeping the pressure on the downside. There is still a slight bid in the market because of the possibility of a skirmish in the Middle East.