EUR/USD rebounded strongly during early European hours yesterday after suffering declines during Asian trade. The decline was sparked by the rebound off the 1.338 ceiling, and was further exacerbated towards the beginning of Europe session when Draghi started his speech in Jerusalem, Israel. At the Bank of Israel conference, the ECB Governor said that he would not hesitate to use “non-standard measures” on top of conventional interest rate policies to help the Euro-Zone get back on its feet. Market interpreted this as Draghi’s willingness to explore negative deposit rates, pushing EUR/USD lower but not significantly, with EUR/USD finding support around 1.333, and unable to test the stronger support around 1.3315.
The recovery post Draghi’s initial comments hit 1.338 once again, but that was not enough to push EUR/USD higher either, with price falling down once again but finding higher support around 1.335, highlighting the stronger bullish sentiment surrounding EUR/USD. Price finally broke the 1.338 resistance during US session, in conjunction with stronger US stocks which drove USD weaker, hence EUR/USD higher. After breaking the 1.338 ceiling, EUR/USD bulls were unable to trade back above the rising trendline that has been in play since late May, resulting in price heading towards 1.338 once more.
From a technical perspective, the breakout from 1.338 can be interpreted as an extension of uptrend from May lows. Despite not being able to trade above the rising trendline, current fresh 3 month high suggest that short-term bullish momentum remain robust, and trading below the trendline could simply be regarded as a lower gear of bullish momentum, and not necessary a bearish take. To be sure, price should ideally clear the 1.34 round number and trade above yesterday’s highs. This will help to alleviate concerns of price breaking 1.338. Should 1.338 gets broken,the consolidation zone of 1.33 – 1.338 opens up again, and invalidates the short-term bullish assertion earlier.
Stochastic readings favors the bears slightly with readings marginally pointing lower below the 80.0 mark. However it should be noted that Stoch curve have flattened significantly, and reduces the likelihood of price breaking the immediate support level. It is highly likely that clarity from Stochastic will come after price rebound from 1.338 or break it, which is in line with the short-term scenarios mentioned earlier.
Weekly chart shows bulls trying to push to 1.35, with Stochastic readings hitting Overbought region. With resistances to be expected from 1.35 to 1.37, it is possible that Signal line and Stoch line start to flatten and perhaps even head lower when price is within the resistance zone. Failure to break the resistance zone will put the major decline from May 2011 to be in play, while a break will help to advance the recovery since Jul 2012.
With US stocks appearing to be more influenced by the easing of Fed’s QE Tapering fears, it is likely that weakness in USD for the past week may due to the same reason. This may mean that the FOMC event risk tonight may lean towards a stronger USD and hence lower EUR/USD as market may have priced in a huge chunk of dovishness on USD prior. Hence, USD may not weaken further on a dovish Ben Bernanke today, but the risk is on the strengthening of USD should Ben Bernanke becomes less dovish than expected. In the event of a less dovish FOMC statement, do continue to see if the strengthening of USD has strong follow-through which may bring the Head and Shoulders pattern on Weekly back into play. A strong bullish scenario for EUR/USD would be the holding of 38.2% Fib in spite of USD strengthening, and that may set the stage for a higher EUR/USD eventually in 2H 2013.