EUR/USD: The Euro has stabilised since Friday’s selloff to two year lows and over the course of the session has squeezed a little higher on increased hopes that the EU members will seek greater fiscal integration within the region, ie to have a common regulator for the banks and greater central union over the banking system. We are promised further detail on this at the upcoming summit at the end of the month, but the hope is that a plan can be conjured up to increase confidence in the EU and underpin the Euro. Over the course of the session, the Euro has done pretty much as we hoped yesterday in sticking largely to the expected 1.2280/1.2380 range, currently trading near the top end of the days 1.2385/1.2509.
Elsewhere today, George Soros, who has a bit of a track record here, warned that Germany has 3 months to save the EU Zone or to risk the destruction of the EU and a lost decade, similar to that in Japan.
On the other side of the Atlantic, QE3 is back on the horizon following Friday’s NFP data and Ben Bernanke will testify to Congress on Thursday. The markets are likely to be reluctant to move too far one way or the other ahead of this, and it may be we have more choppy trade ahead of us for the next 48 hours. We also have to watch out for any possible movement in rates from the ECB meeting, which will also be on Thursday. No change is expected.
Equities have had a mixed day, although the DAX headed lower (DAX -1.19 %, CAC +0.14%, S+P -0.27%) and even hit our long term target at 5960, from 6545 (May 7 outlook). An 8.9% move! I’ve had worse trades, and have squared up for now, although the charts suggest that there is plenty of downside potential in front of us.
Technically, the Euro has squeezed up to meet the trendline resistance, and as I said over the weekend, the levels to watch are – on the topside – at 1.2500 and 1.2525. We have already reached the first of these and ideally, for the bigger picture, I would like to see 1.2525 hold. For the longer term Head Shoulder formation to remain uncomplicated, it would be ideal if the Euro were to fail up here and to head lower! We shall have to wait and see but the oscillators suggest that this is unlikely and a break higher would most likely see a quick move to 1.2670. This would not negate the Head-Shoulders, but could make it a little messy. In the meantime, while the head shoulder formation remains intact, the long term objective for this is at around 1.0350
The downside for today, now has short term support at 1.2460 and then at 1.2430. The day’s lows at 1.2385 will see bids ahead of further minor support at 1.2365 ahead of Friday’s lows of 1.2288. I still think we are on target for 1.1875 (8 June 2010 low), and then, as I have said possibly to 1.0350, but that is a long way off yet.
We need to be a bit nimble here, though. The dailies are oversold and point a little higher. The market is very short, and may be a little too comfortable in being so, so if a rally does develop, it could really find some legs as those shorts scramble to cover. I would be leaving SL fairly tight in around the 1.2550 area.
Today sees EU Service PMIs, Retail Sales German Factory Orders, US Non-Mfg ISM.
