USD strengthened significantly following Ben Bernanke’s surprise QE timeline revelation. Based on what Bernanke said, there is a very high likelihood that QE3 purchases would be lowered in 2H 2013 and stopped entirely in 2014 – caveat being economic and employment growth remains the same or better.
As USD has been weakening in recent days on the belief that Bernanke won’t say anything of that sort, market took a unpleasant surprise, resulting in the long EUR/USD bearish candle (see hourly chart) which has broken the 1.338 resistance turned support and the previous lows of this week.
From a technical basis, bulls gave back 4 full trading days of gain with the move back below 1.33, which is acting as an intraday resistance. On top of that, price is also trading below the 1.328 resistance turned support which is also the onset of the rising trendline which represents the previous rally – in play just before Bernanke spoke.
Price did rebounded slightly towards 1.33 but ultimately failed to reclaim the round figure. This underlines the strong bearish undertones which is understandable given such an important news event turnout. As such, even though Stochastic readings are currently deep into Oversold territory, we cannot assume that a turnround will be likely soon especially since both Stoch and Signal line are still pointing lower. Should price manage to break 1.326, we could see acceleration towards 1.324 and potentially lower as the bear trend takes full flight. Any negation of current bear trend will require 1.33 to be cleared, if not a breakout scenario from the rising trendline will remain in play.
Things are not looking so hot for Weekly Chart right now, with price looking likely to end this week with a bearish candle. This would jeopardize current bullish quest to clear 1.35 and confluence with 50% Fib. However, things aren’t looking as bearish as short-term chart, as price would need to break below the 38.2% Fib and preferably below 1.27 in order to invalidate current uptrend that has been in play since Aug 2012. Stochastic readings are also far from being overly extended. Should bulls in EUR/USD remain strong, it is possible that yesterday’s movement can simply be regarded as “noise” versus the broader longer-term sentiment.
However, this is where the assumption fails. EUR/USD has been rallying recently mostly due to USD weakness. In similar vein, EUR/USD was dipping during early 2013 due to USD strength on the back of stronger US stocks (whose correlation has since reversed) and rumors of Fed’s tapering in 2013 (which has just been confirmed by Bernanke). EUR in itself has been relatively lifeless as there are almost no focus on the Euro-Zone right now despite major issues coming up (Germany election, Greece and Spain insolvency). This implies that we will have more downside risks than upside risks moving forward, as it is likely many of the event risks are not yet priced in. Furthermore, without an inherent fundamental driver to push EUR higher, a stronger USD from here is more likely to pull EUR/USD lower with ease.
Finally, with Ben Bernanke pulling a shocker despite staying dovish just 1 month ago, reputations of Central Bankers have taken a huge hit. As such, Draghi’s bullish rhetoric will be likely to have lower impact and may be seen as futile embellishment by the market. This makes the outlook for EUR more bleak than ever in the short-term.
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