EUR/USD: 1.3115The USD continued to be heavily sold on Friday following the previous day's announcement of open-ended quantative easing by the Fed, at one point reaching 1.3168 against the Euro, before closing mildly lower as profit taking set in before the weekend. It looks as though this rally has further legs in it, and given the Central Bank actions of last week, a break above strong resistance at around 1.3200 cannot be ruled out.
With Mario Draghi and the ECB working on easing the debt problems in Europe, Mr Bernanke and the Fed flooding the US market with cash until the labor market improves, and with the speculation that China will add further stimulus to its own domestic markets through large infrastructure projects and possible interest rate cuts, the three largest official influences are all intent on restoring growth and look like creating a risk-asset bull market for at least the near term, pushing the dollar lower in the process. Future Non Farm Payroll Data will now take on even more importance than usual and upside surprises will ensure some pretty hectic volatility and a swift reversal lower for the equity markets and the Euro, as the US$ once again finds its feet.
How long this risk rally can be maintained is unclear and it may well create a very large headache down the track. The first whiff of inflation, caused by all the cheap funds sloshing around in the system could cause a very quick reversal. The ECB won't want the Euro to rally too high either. EU growth is already at zero, if not in reverse, and a stronger currency will only serve to strangle their export markets. For the time being there is no real reason to doubt this Euro rally, but I remain very cautious, even rather dubious, as to how long it can continue until we see a sharp reversal lower. However attempts to pick the top can be a dangerous and expensive game, so for the time being stay with it and keep downside stops firmly in place.
Anyway, all that remains to be seen and back in the real world, the Euro currently looks as though it wants to take a peek at the major downtrend resistance at 1.3205. Before then we need to get a sustained rally above the Fibo level at 1.3145 (38.2% of 1.4939/1.2042 and then above Fridays 1.3168 high. A break above the downtrend resistance would carry us on to 1.3283 (1 May high) and then to 1.3380 (2 April high). The dailies are pointing in this direction and the market will be looking for appropriate dips to buy into over the next couple of sessions.
A return to the downside will see buyers at minor levels of 1.3075 and then at 1.3000, but the first Fibo support is not to be found until 1.2905 (23.6% of 1.2042/1.3168).
Stay flexible, with the trend remaining higher, but with some nasty downside spikes ahead of us I suspect.
Economic Data this week includes:
M: EU C/A, Trade Balance
T: German ZEW Survey
W: US Building permits, Housing Starts, Existing Home Sales
T: EU Consumer Confidence, German PPI, EU Mfg/Composite/Services PMI, US Mfg PMI
