EURUSD – Weekend Concern Halts Rally

The euro has shown fantastic resilience against the dollar in recent weeks in the face of a Greek default and messy “Grexit” that would create enormous amounts of uncertainty for the monetary union.

Having rallied as high as 1.1436 on Thursday, the pair appears to be running out of steam and I’m sure it’s no coincidence that this comes ahead of a weekend filled with uncertainty and risk.

In recent articles on this pair, I have argued that the uncertainty around the Greek situation is having no impact on the pair and it’s equally important to note that it doesn’t reflect people’s lax attitude towards Greece leaving, despite what is being suggested.

While interest rates and inflation may be driving the euro right now, not uncertainty, that doesn’t mean that Greece defaulting or being cut off from the emergency liquidity assistance (ELA) program, for example, won’t negatively impact it. These are real negative developments that could easily be followed by a Grexit that would have an impact on the eurozone and the amount of assistance the European Central Bank will have to offer.

The last two daily candles (including today’s which is not completed yet) are quite bearish, although not overly so. A shooting star is the more bearish of the two but the main body is green which takes the edge off. If today’s closes as it is, it’s a hanging man, which is bearish but not a great signal on its own. Combined though, I think they look quite bearish, or display strong indecision at the very least and around a key area of resistance between 1.14 and 1.1535.

The MACD histogram is showing signs of divergence as well, albeit marginally. These are not the most bearish of signs, but they are red flags.

The pair is rallying again now and if it continues, 1.1436 becomes very important as a failure to break it could lead to the formation of a double top. Also important is the ascending trend line on the 4-hour chart which has held strong until now. If this is broken, for me it would be a strong bearish warning.

Ultimately, only a break above 1.1535 will make me bullish at these levels and ideally, I’d like to see a daily close above here. To the downside, 1.1050 is extremely key but there should be warning signs before then that the pair has turned more bearish.

One key point here is that the forex markets are closed over the weekend. Any significant developments on Greece in this time could have a major impact on the opening levels next week. If a Greek deal is done, I would expect to see some upside in response but I think there is a far bigger risk to the downside if talks completely collapse which would lead to a collapse.

I don’t think either of these will happen as an EU Summit has been arranged for Monday to discuss Greece while the ECB has agreed to have another teleconference on Monday on the ELA, having extended it to Greece today. The latter in particular could have been a big risk to Greece over the weekend had that not taken place today.

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