Despite US stocks climbing slightly higher on Friday (S&P 500 +0.27%, DJI +0.28%), EUR/USD continued the downtrend that was catalyzed by the surprise revelation of a QE3 tapering timeline by Ben Bernanke during last week’s FOMC scheduled announcement. Considering that USD strengthened significantly on the back of Bernanke’s announcement, which pulled stocks lower as well, a technical rebound in stocks should in theory pull USD down as well, which would mean a bullish impact for EUR/USD. Looking across other majors, AUD/USD and USD/JPY were trading flat on Friday, unlike EUR/USD adding credence to the assertion made. This would imply that EUR/USD decline is considered broader trends, underlining the current bearish trend that we are experiencing right now.
Price is currently trading within a descending Channel, with current price still a fair distance away from Channel Bottom, which suggest that price may be able to fall further before finding support. Early Monday saw EUR/USD gaped below 1.31, but bulls managed to push price back up above. Price is currently trading below the interim resistance taking reference from the turning point of last Friday trade (happened just around midday New York). If the resistance level holds, the possibility of price breaking 1.31 increases, and a break of 1.31 may result in an acceleration towards the bottom Channel. 1.305 could potentially provide some weak support, just as how 1.325 and 1.315 has been acting on Friday.
Stochastic readings is on the brink of breaking out of the Oversold region, which would mean that a bullish correction may be in the pipeline. However, it is also possible that Stoch readings may simply rebound off the 20.0 level and push lower, similar to what we’ve seen from the small rebound post Bernanke’s announcement. Hence this should not be taken as a sure sign that a corrective rebound is coming. But in the event that 1.311 (the interim resistance) is broken, it is possible that Stoch levels may exit Oversold and give us a stronger bullish corrective signal. But even in such a situation, there is the likelihood that price may find resistance back along 1.315 with the confluence with Channel Top, hence bulls will really need something extra (perhaps in the form of fundamental impetus) to breakthrough and alleviate current bearish pressure.
That may be a tall order, considering that last week’s candle closed below the 38.2% Fib. Though this does not necessary invalidate the corrective rally from Aug 2012, it does put the decline since May 2011 in an advantageous position. Stochastic readings shows a Stoch/Signal cross which is an early sign for a bearish cycle in the next few weeks. However as the cross happened not within the Overbought region, prudence may be preferred. Case in point, there is still the possibility that price may rebound from here and trade back towards 1.35 (which will most likely send Stoch levels higher into the overbought region), and then subsequently get rebuffed by the 1.35/50% Fib confluence (which may be a stronger and “cleaner” bearish cycle signal than now).
Fundamentally, EUR/USD is in the dog days. Even though recent Purchasing Manager Index for Euro-Zone were better than expected, all PMI data continue to show signs of shrinkage, not expansion. Furthermore, recent EU Finance Ministers meeting in Luxembourg failed to establish any agreement for banking reform, despite both Commissioner Olli Rehn and French Pierre Moscovici being quoted on Friday that a resolution can be expected from this meeting. All is not lost though, with the leaders scheduled to meet again on Wednesday. However, that may be another event risk that is heavier on the downside. Should Wednesday disappoint again, EUR/USD could trade lower, but a confirmation of EU agreement may only result in EUR/USD holding onto pre-event levels rather than rallying up strongly due to overwhelming bearish pressure and the already priced in success. There may be more landmines ahead for EUR/USD in terms of future event risks given current bearishness. A good news is simply disaster averted while any bad news is akin to a landmine exploding. Traders should thread carefully.