The September Euro is rallying this morning after testing the 50% level at 1.2164 overnight. The actual low of the break from Monday’s high was 1.2167. The ability to recover after early session weakness is a sign that investors are shrugging off yesterday’s news that Moody’s downgraded Greece’s debt. The strong turnaround has put the market in a position to take out yesterday’s high at 1.2297. The main trend on the daily chart will remain down, however, until the May 28th top at 1.2453 is violated.
The Euro surged early in the session on Monday as upbeat feelings about the global recovery helped drive up demand for higher risk assets. Yesterday’s strong rally was a continuation of last week’s bottoming action which was triggered by positive comments from Fed Chairman Ben Bernanke and European Central Bank President Jean Claude Trichet.
Bernanke told the Senate last week that he believed that Europe has the money to protect its currency from collapse. The market rallied on his comment because it meant that Europe would use all means to prevent sovereign debt issues from escalating. Trichet said the ECB would not increase stimulus in the economy. This meant the economy was strong enough to not require any additional aid from the central bank. Both comments were supportive to the Euro.
Late Monday, the Euro broke from its high but still managed to hold on to most of its gains. News of a downgrade of Greece debt by Moody’s made weak longs nervous, triggering a profit-taking break. Many traders feel that the break was unnecessary because the move by Moody’s was based on old news. Investors also feel more optimistic about the Greece’s future finances.
Last week’s closing price reversal bottom at 1.1876 was confirmed on Monday. Based on this pattern, watch for the start of a 2 to 3 week retracement with 1.2784 the next potential upside target.
In summary, the weekly chart is set up for a strong retracement rally to 1.2784, provided the Euro holds a test of a minor retracement level at 1.2087 over the next few days.
The main trend in the September British Pound turned up on Monday when the market crossed the last swing top at 1.4769. There was very little follow-through to the upside, however, because the Sterling ran into a 50% retracement level at 1.4810. The British Pound is under some light pressure this morning after it was reported that U.K. inflation slowed in May for the first time in three months.
Technically, the main trend is up, but the rally could stall unless upside momentum can overcome resistance at 1.4810. Regaining this price and building support can trigger another rally to the .618 retracement level at 1.4947.
The September Japanese Yen is trading better this morning despite greater demand for higher risk assets, lead by a rally in U.S. equities. Investors are supporting the Japanese Yen after the Bank of Japan said Tuesday it would offer financial institutions up to 3 trillion yen in new lending. “Through this measure, the bank expects that the efforts of firms and financial institutions to support Japan’s economic growth will be further stimulated,” the BoJ said in a statement. Traders seem to like the news and are buying the Japanese Yen as a sign of support for the BoJ’s decision. 
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