The EUR pushed lower yesterday, breaking the previous 1.306 swing low and extended the bearish move post Bernanke’s Tapering talks. This decline is similar to the one on Tuesday, in the sense that there wasn’t any major news releases relating to the Euro-Zone that would have weakened the fundamental outlook of the area. Looking at the economic news docket, we have German Consumer Confidence (survey conducted by GFK) which came in at 6.8,slightly better than the expected 6.5. French GDP (Final) remained at -0.4% Y/Y and -0.2% Q/Q, which is of course not positive, but merely confirms earlier estimates and should not have been the catalyst that drove EUR lower (it could have been much worse, just ask US). Other than that, we have ECB’s President Mario Draghi speaking in France during early European hours, sprouting his usual bullish rhetoric – that the ECB “stands ready to act again when needed”, but warned that individual state Governments need to reform their economy at the same time. He reiterated that ECB has done “as much as it can” to keep the Euro-Zone afloat, and that states need to do their part. It is hard to imagine that market would be bearish the EUR following the speech, considering that Draghi has sung similar tunes before – Count on ECB to clean up mess, but Governments please up your game.
Nonetheless, it is important to recognize that bearish acceleration yesterday took place during early European hours, which suggest that Draghi’s words do have some impact. But if we look at equities, European stock markets remained broadly bullish, with DAX gaining 1.66% and FTSE 100 by 1.04%. Hence it is clear that the movement lower that broke the 1.305 is due to bearish sentiment surrounding EUR only, and not truly fundamentally driven. That doesn’t mean that the bearish sentiment is week. Looking at price around US opening hours, the weakening of USD following the weaker GDP print only allowed price to rebound back to 1.305, with EUR bears quickly finding bargain sells to drive price back towards 1.30. This is a testament to current strong bears, and suggest that the current bearish momentum may continue even though we’re looking at a small corrective rally above 1.30 right now.
From a technical perspective, Channel Top remains the target for current corrective move. The likelihood of prices breaking Channel Top is lower considering that price will be likely to hit 1.305 ceiling if current bullish pace is maintained. Stochastic readings is also likely to hit the Overbought zone when price rally from here, lending weight to the 1.305 resistance.
Outlook on the weekly chart remains. 1.30 remains an important level for bears to break in order for the Head and Shoulders pattern to form. Bearish acceleration may take place should 1.30 is broken and allow momentum to push towards the neckline. From there on, if the neckline is broken, the bullish rally from Aug 2012 lows would have been invalidated, which opens a move for 1.20 and perhaps a longer-term bearish extension of 2011 May’s decline.