Forex Headlines and EUR Chart Analysis

Tuesday, December 30, 2008

What is going on?

  • Sentiment in the stock market is still negative after a dismal retail holiday season saw empty parking lots in malls across America the day after Christmas – usually a jam packed shopping day.
  • Crude oil is rising on the news of the tensions and fighting in Gaza
  • USD weakens vs. EUR as fear increases that data will show new U.S homes declined to the lowest level in more than 17 years.

The situation in Gaza has grabbed the headlines due to its potential effects on oil and the USD. If we glance over at the oil futures, the rally triggered by the conflict is surprisingly unremarkable and well within the norm for rallies within the overall downtrend. The rally in EURUSD yesterday, on the other hand, turned heads as the pair sliced all the way to 1.4350 before turning tail as the oil rally proved unsustainable and as EURJPY dove on an equity market sell-off in the North American session. Later, EURUSD backed up to 1.4100 as the move lower proved excessive and was likely aggravated by thin liquidity, a condition that will continue until the New Year gets under way. All in all, we have a compelling reversal formation in EURUSD based on the bearish daily candle, but need confirmation through the 1.3915 area lower as this area has managed to hold the pair for over a week now with multiple tests. The setup for EURJPY is similar, but we need to see the pair slice through 126.20 for further confirmation. For EURGBP, see the chart in the charts section below, in which we discuss the potential for trend exhaustion.


A year ago, parity in EUR/GBP was a distant fantasy. Now, traders attach more than 30% probability that the pair will rise above 1.00 within three months. But how severe is the situation for the pound? Why has sterling ended up being the least wanted G10 currency in 2008? What would it take to push sterling the final step above the ‘magic’ parity? Is it likely to happen?

We conclude that another downward revision of UK growth prospects relative to the Euro zone, or an adoption of quantitative easing from the Bank of England’s Monetary Policy Committee, another downturn in financial equities, or a further rise in implied FX volatility could potentially push EUR/GBP beyond 1.00. However, we believe that such an erratic move would not prove long-lived.


Despite intra-day rise to 1.4135, the subsequent retreat suggests consolidation with a bias towards the downside. Note that EUR/USD is still staying well within inner rising channel and the rise may still continue. Anything above 1.4719 will put focus back to the 1.4867 key resistance level. On the downside, below 1.3937 minor support will indicate that a fall from 1.4719 is still in progress for the 1.3629 cluster support. A break there will turn short term outlook bearish for decline towards a 1.2329 low.

In the bigger picture, a medium term bottom is no doubt in place at 1.2329 and fall from 1.6038 should have been completed. Such a decline could either be viewed as being a three wave sequence that's completed at 1.2329 or a five wave sequence that's completed at an very orthodox low at 1.2423. In either case, as long as the 1.4867 resistance level holds, such a fall from 1.6038 is still the favorable choice. Though, some larger scale consolidation could be seen first. However, anything above 1.4867 will dampen the bearish view and argue that a stronger rally would be seen to retest 1.6038 the record high.

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