The Federal Reserve arguably surprised the market on Wednesday by not only not following the recent trend of central banks taking a dovish tack, but even looked to add more hawkish language to its statement. With the ECB only recently announcing its ultimate weapon, sovereign debt asset purchases, many would argue that the euro is set up for further weakness. However, since Wednesday’s FOMC statement the euro has belied the bears and has been broadly trading in consolidation mode. In addition to this, the euro has held up this morning in the wake of lower than expected CPI data. Could it be that the sellers are running thin? Is the euro ready for a technical rally?
Let me start off with the technicals on Euro/Dollar. They are still very weak. My strategy of analysis involves multiple confirmation and on this basis, the euro is still under pressure. Moving averages are all in decline, the sharper 6 week downtrend is intact (current resistance at $1.1430) and the RSI is still languishing around the low 30s. However the Stochastics have started to bullishly diverge and now today, it looks like the MACD lines are beginning to bottom. This is just very early days but there are chinks of light at the end of the tunnel for the euro. A close above $1.1422 would certainly raise a few eyebrows.
Just as an aside too, I felt that it was extremely interesting to see the low on Monday at $1.1098 which was within 5 pips of the 100% Fibonacci projection target (of $1.1093) of the $1.4939 to $1.2040 measured from the May peak of $1.3992. An interesting low indeed. What you will tend to find is that there will often be consolidation around key Fibonacci levels.
Interestingly, since the last day of real selling pressure (last Friday the 23rd January), the euro has been the best performing of the major currencies against the Dollar Index (which for this comparison includes the performance of gold and silver). The euro has outperformed the dollar basket by 1.8%, whilst sterling and the yen are the only two majors to have outperformed the dollar in this time.
So with the market now fully pricing in ECB QE, the uncertainty of the Greek elections out of the way, the Federal Reserve monetary policy been and gone, and now this morning a worse than expected decline in the Eurozone HICP also not impacting the euro, what is left to drive the euro lower in the near term? Unless US GDP smashes the light out, could it be possible that the sellers have already sold? If the technical indicators begin to improve as well, starting with a breach of the 6 week downtrend, the prospect of a technical rally will grow.