Not much movement in EUR/USD with prices trading within 1.392 – 1.394 in the past 12 hours. This is in stark contrast to what we’ve seen in the previous day where EUR/USD traded lower initially but started to climb sharply during early US trading session. Both the decline and rally were difficult to explain away. Risk sentiment during Asian hours yesterday was actually bullish, which should drive classic “risk currency” like EUR/USD higher.
Similarly, the rally was strange when we consider that Euro-Zone CPI number was weaker than expected – prices did pushed lower initially when the economic data was released during 6am EST, but prices rebounded quickly, igniting the rally towards 1.394 resistance. If were to surmise that sentiment of EUR/USD is bearish based on earlier decline, then we should have seen stronger bearish movement when the CPI numbers released. Some may argue that weaker than expected US Empire Manufacturing numbers released at 8.30 am EST may be the culprit that trigger a weakness in USD and hence allowed EUR to rally. But if that is true, then we should have seen USD strengthening back when stronger than expected Industrial Production numbers were released 45 minutes later. Furthermore, the bullish reaction in EUR/USD is indeed too strong to be chucked under USD weakness when similar rallies were absent in other major USD crosses.
Hence, it is not difficult to label yesterday’s rally as unjustifiable and it is equally not surprising to see prices pushing lower after the strong rally. This also implies that we could see prices trending sideways in the immediate near term as neither bulls nor bears are really establishing dominance. Stochasitc readings are pointing higher but readings have been staying mostly sideways – around the levels post 1.394 test. Hence, traders may need to wait for further confirmation if any short-term trend develops from here. Swing traders may be delighted as sideways trend tends to mean that resistance and support levels will mostly stay intact. Therefore, it may be a no brainer to place buy orders on Support level and sell orders on Resistance, but there is also certain risk involved as evident by yesterday’s movement where prices did break 1.39 round figure before rebounding back. Translating this possibility to current price action, we could see 1.392 broken only to see it climb back once again later today, and that may be detrimental if traders have tight stop loss. To circumvent this, a wider stop loss may be needed but that would also increase risk of larger losses. So swing traders will need to weigh their Risk/Reward and see if trading right now when sentiment is messy is worthwhile.
Things are clearer on the Daily Chart though, the bullish breakout of 1.3815 resistance is clearly underway, and with prices staying above the swing high of December 2013, we are in the next phase of breakout which should bring us even higher than current level. Channel Top may be a good bullish objective, but it is uncertain whether EUR/USD can reach there considering that bullish momentum is clearly overbought looking at Stochastic indicator. The fundamentals for a higher EUR/USD is weak as well as USD is expected to strengthen in 2014. Hence, a strong continued bullish trend for EUR/USD will require extraordinary bullish push in EUR. Certainly ECB being less dovish than before is helpful to the bullish cause, but that would only mean that EUR will not weaken further which is very different from saying that EUR will be stronger in the future.
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