Despite the PBOC announcement which drove up risk appetite during late Asian afternoon/Early European trade, sending risk correlated assets higher, EUR/USD still found it hard to break the 1.315/38.2% Fib retracement. Prices were rebuffed and sent lower during the first attempt around 2am EDT, but found slight support in the form of 1.311 intraday consolidation floor and confluence with descending Channel Top. This allowed price to retest 1.315/38.2% Fib once more, at the same time affirming the Channel bullish breakout. However the 2nd attempt was even more dismal than the first, with price unable to re-test the intraday high with the resultant bearish rejection even stronger than before. Perhaps Bulls may cry foul and protest that it is not due to their undoing, but that stronger US data came in at the worst inopportune time possible. That may be true, but it should be noted that EUR bulls failed to take over USD even though US stocks faltered towards the end of the trading session, with EUR holding onto the day losses despite stocks giving up their gains. Hence to say that EUR bulls are fully without reproach is incorrect. With price straddling along Channel Top lower during Asian session, yesterday’s bullishness is all but gone and may hint at a return to bearishness with price heading back towards Monday’s lows.
From a Technical perspective, it is entirely possible that price may still trade lower while staying above/on Channel Top. However, any slight acceleration of bearish momentum may result in even stronger acceleration towards Channel Bottom. With Stochastic readings entering Oversold region and 1.306 not yet broken, there is still a likelihood that price may rebound slightly higher from here towards 1.31-1.311. But this does not invalidate current bearish bias, with 1.315/38.2% Fib still key even in the short-term for bulls to stake their commitment for a stronger recovery.
Looking at Weekly Chart, the Head and Shoulders pattern is looking more and more likely to be formed. However before we jumped the gun and declare a top, it is important to note that half the trading week is not even gone, and there remains the possibility that current dip could simply be a “fakeout”. Trading below 1.30 will reduce this possibility, but even then should price close above the 1.315/38.2% Fib, the Head and Shoulders scenario will be invalidated and price bias will point higher towards 1.35 and the 50.0% Fib.
Fundamentally, there isn’t much coming from the Euro-Zone right now as we approach the end of the week. Finance Ministers from member states are scheduled to meet today on banking reforms resolutions, and we could see some bullish news that emerge if agreements are made from the meeting. However, there is a lower chance that EUR/USD will simply sustain a rally from here with the lack luster EUR bulls explained previously, and any failure to come out with an agreement may result in further degradation in confidence/bullish sentiment which may send EUR/USD lower before German data come in on Thursday and Friday. Traders should also keep a look out for USD strength for the rest of the week. As described here, USD movement with respect to the bearish stocks outlook could yet play an important part in EUR/USD for the rest of the month and potentially 2H 2013.