What’s the next move for the EUR/USD

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By FXEmpire.com

At the end of last week, trading in the Eurodollar showed some strange action. There were very few economic data on the calendar in Europe. An Italian bond auction passed without having any major impact on global markets. Sentiment on risk was cautiously positive. European equities moved gradually higher. Investors apparently drew some comfort from the Chinese Q2 growth report.

During the morning session, the usual link between risk and EUR/USD didn't work. EUR/USD failed to profit from the bid on (most) European equity markets. Even more, the EUR/USD came again under pressure and the pair even dropped to a minor new correction low early in the US. At that time, there were headlines on the screens of a think tank report that the ECB could lower the deposit rate into negative territory. However, there was no follow-through selling and a break higher in the US equity markets finally triggered an intraday short squeeze in EUR/USD. The cross rate changed course and jumped almost one big figure to set an intraday high at 1.2257.

This was a nice rebound, but once again there was no follow through price action (this time to the topside) even as equities remained well bid into the close. So, the jury is still out whether the decline in EUR/USD has run its course and whether there is room for a more pronounced correction. IMM data showed that investors added to USD long positions while number of euro shorts had been raised again.

At this time indicators on market positioning were not always a good pointer to predict the next market move. EUR/USD closed the session at 1.2249 compared to 1.2203 on Thursday evening.

To kick off the week, Asian equity markets show only very moderate gains compared to the rebound in the US and in Europe on Friday. There is still a lot of market chatter on action from the Chinese authorities to support the economy. A more and more rumors of monetary stimulus after comments by the Chinese Premier, worried the markets and is not a big help for sentiment on risk.

EUR/USD is a few ticks lower from Friday's closing levels. (1.2193 and falling )

Later today, the EMU CPI data will be published. Inflation is expected to be confirmed at 2.4%. We don't expect this report to be a key driver for EUR/USD trading.

In the United States the Empire manufacturing, the retail sales and the business inventories will be published. Especially, the retail sales will get ample attention. Only a moderate increase is expected. A poor figure might again be slightly negative for risk. However, Friday's price action already showed that the link between EUR/USD and risk is not that tight anymore. In addition, investors will also look forward to the Tuesday's monetary policy report of Fed Chairman Bernanke before the Senate.

Traders expect that the Fed president will keep the door open for more policy stimulation, but he will probably refrain from giving too many concrete hints. More policy stimulation should be good for risk and bad for the dollar. In this respect, it is not that easy to predict the market reaction in case of a poor retail sales report. So, as was the case on Friday, one can expect more 'erratic'-like trading as investors still ponder the impact of a potential policy response to the data. In a broader perspective, Friday's price action didn't give a clear signal. The decline of EUR/USD is slowing but has not stopped and technicals also remain bearish for the time being.

Click here for updated EUR/USD News.

Originally posted here

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