Euro

The major holiday period for North American and European markets is just beginning and much of last week’s short-covering in the EUR and in other ‘risk pairs’ can be attributed to position reduction before the big traders take some time off. Comments from the EZ and ECB merely served as triggers to set off this short-covering.

The beginning of this week is likely to bring more consolidation but I do not expect any significant fundamental moves to happen over the next few weeks. We are likely to see further position adjustment but long-held ranges will hold unless something very unexpected happens.

EUR/USD bounced very sharply from 1.2040 to 1.2400 in the last 3 days of the week, a sure sign of an extremely oversold market. Nevertheless, the trend remains bearish so it was no surprise to see the rally stall at solid technical resistance near 1.2395 (see chart), where the 50% retracement of a 5-wave downmove from 1.2750 to 1.2040 coincides with the bearish trendline from 1.3285 through 1.2685. Those clever Sovereigns who bought below 1.2100 were also selling in size above 1.2300. Therefore, expect some more whippy intraday action for the beginning of this week but I suspect that the major short-covering drive is now complete. I favour playing 1.22/1.24 short-term range.

EUR/USD daily chart

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AUD/USD has taken out technical resistance between 1.0440/75 but this market smacks to me of extended range trading and I don’t want to get suckered into getting bullish at the top. We’ve been basically trading between .95/1.10 for coming on two years and whilst this range will of course break at some stage, I see no reason for it to happen right now. The short-term trend is quite bullish so we may indeed see a test of 1.06 and possibly even 1.08 over the coming weeks but these rallies are
selling opportunities in my opinion. No important economic data due today.

The JPY crosses have also undergone some quite heavy short-covering in the last few days. AUD/JPY needs to break above 82.40 in order to increase bullish momentum and EUR/JPY looks like it has also started it’s retracement. I have taken a long position in USD/JPY as I fancy that there may be some upside there back towards 82.00. Japanese industrial production is due today but is unlikely to move the market.

Good luck today.

Sean Lee, Founder at FXWW.