EUR/USD: 1.2805The Euro, which was already well bid on Friday in the wake of the Mario Draghis proposal for the ECB to commence its bond buying programme, to assist the more indebted nations of the EU, accelerated sharply higher after the poor NFP data, where only 96,000 jobs were added - against expectations of 125,000.
Stop losses on existing short positions only helped the Euro, on its way to the 1.2816 session high as speculation increased that the Fed will finally act to introduce QE3, possibly as soon as the upcoming FOMC meeting, later this week. Market sentiment after the Friday data has already gone a long way to pricing in that he will act, although should he do so, I suspect we are still likely to see a spike in the Euro as the market looks towards 1.3000.
If the Fed fail to act, the market has set itself up for a nasty correction and the current dollar weakness will reverse very quickly. - Wait and see on that one, but the lack of any real progress in the Equities markets on Friday (S+P + 0.4%, DJI +0.1%) seems to suggest that although the data was poor, it may not have been poor enough to necessitate immediate action on the part of the Fed.
Ahead of the FOMC, we have some major event risk in Europe, when the German constitutional court will vote on the ESM on Wednesday. The court is ruling on whether or not to grant an injunction request against the ESM, further delaying it from becoming operational. The same day sees the Dutch election, so it could be a busy session..
Technically we have now broken above the top of the channel (see chart) and the market will be watching the 200 DMA at 1.2840, where there should be plenty of selling interest. A break above this would see further short covering and I dont see too much resistance until we hit 1.2900 and more importantly 1.2973 (16 Feb low), ahead of 1.3000. Early in the week though, the short term indicators are now very overbought and some 1.2700/1.2840 choppy trade would seem to be in order until we get some resolution on the German court ruling.
The downside could, as I have said, see a return lower, to test the strength of the previous channel top, at 1.2700, below which would see further buyers at 1.2650 and 1.2600. These lower levels, in the short term, look most unlikely to be seen, given the way the medium term indicators are pointing higher and for Monday (and possibly Tuesday) look for 1.2750/1.2840 to cover it.
In the longer term, the markets are becoming very frustrated at being short the Euro and continually being squeezed. We will soon reach a point where traders throw up their hands in despair and it will only be then, when the bulk of the shorts have cut their positions that we are likely to see any real downside momentum develop.
This week has plenty of scope for the "buy the rumour - sell the fact" type headlines, so stay nimble and watch for the possibility of a nasty squeeze higher before a nasty collapse with nobody on it!
On the other side of the coin, we are now less than 60 days until the US election and it could well be that the dollar continues to frustrate us all, and to trade in a 1.2600/1.3000 range until we it is out of the way.
For today - look for 1.2750/1.2840 to cover it.
Economic Highlights this week will be:
M: China trade balance, EU Sentix Investor Confidence,
T: US Trade Balance,
W: German CPI, EU Industrial Production, German Court Ruling on ESM
T: FOMC I/R Decision
F: EU CPI, EU Council Meeting, US Retail Sales, Cap. Utilization, IP, Inventories, Reuters/Michigan Consumer Sentiment Survey
