EUR/USD Technicals – 1.34 holding after unexplained rally

Yesterday was a strange day for EUR/USD. Despite the furore surrounding Syria and the impending US military involvement which drove safe havens such as Gold and Treasuries higher, EUR/USD actually rallied. This is strange considering that all other Safe Haven currencies gained strength as well – CHF, JPY rallied. Though USD was the weakest of the 3 major Safe Haven currencies, the Greenback still managed to strengthen against GBP, AUD and NZD, losing out only to EUR as far as major “risk currencies” go. But even this isn’t the strangest part of yesterday. The interesting fact was that EUR/USD actually traded sharply lower during European hours, in line with other risk correlated asset as European traders began to price in the Syrian unrest. This happened even though German IFO Surveys came in slightly better than expected, which should have been a bullish push for the EUR. However, the losses suffered during European hours were erased quickly during US session. Prices pushed 60 pips higher, a move that is unrivaled in all other USD pairs during the same period.

There are good reasons for USD to weaken then, as S&P/Case-Shiller Housing Index came in weaker than expected, with the 20 City Composite Index gaining 0.89% M/M vs an expected 1.0%. Y/Y fared slightly better, coming in 3 bps lower than the expected 12.1%. A weaker housing data impairs Fed’s belief that US economy is stable enough for a tapering action in 2013, pushing USD lower. However, this explanation would have meant higher Stock prices as well, which is certainly not evident.

Hourly Chart

Perhaps another plausible reason is that US market favored the IFO data more than European traders, resulting in the strong rally, but that sounds like clutching at straws and perhaps it may be better to just chuck yesterday’s rally as one of those unexplained market reaction.

Why is this unexplained market reaction important then? It seems that prices failed to break the 1.34 significant resistance despite the stupendous movement, and is currently pushing lower below the rising trendline. This puts downward pressure on price, and we could potentially see a technical move towards 1.320-1.340 if the 1.338 support/resistance level is broken. Stochastic readings agree with such an assessment with readings looking to embark on a bearish cycle signal. However, the signal is not formed yet, and hence the 1.338 break is necessary and it is likely that Stoch readings will breach the 80.0 level when price breaks 1.338. The fact that we can’t find anything fundamental to support this extraordinary rally adds more pressure downside, as the likelihood of a pullback becomes higher.

Daily Chart

Pressure is upwards for daily chart though. The rebound from Channel Bottom from 22nd August have yet to touch the Channel Top, and yesterday’s decline which tagged Channel Bottom briefly adds further bullish pressure. However, 1.34 remains the key before any discussion for a move towards Channel Top can happen. Stochastic readings is neither here nor there; on one hand it seems that we are in a long-term bearish stoch cycle, but Stoch readings are still pointing higher, with the previous trough found around the same levels of early May. Hence we could still potentially see a rebound of the Stoch readings back into Overbought region in the near term. That being said, technicals do support a bearish case which would see recent push above 1.34 the 2nd Top vis-a-vis the top back in June. But this wouldneed price to break Channel Bottom which will open a move back towards 1.32 as 1st level bearish target.

More Links:
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