After an early morning setback, the U.S. Dollar index is showing signs of a reversal bottom led primarily by weakness in the June Euro. Overnight the Greenback pierced a key .618 retracement level indicating weakness. Although a closing price reversal bottom is being formed, it is most likely being shaped by profit-taking following a prolonged move down in terms of price and time. The first sign of real strength will be regaining 74.10 on a closing basis.
Last week the June Euro turned the main trend up on the daily chart when it crossed a swing top at 1.4339. The market accelerated to the upside after the single-currency regained a retracement zone at 1.4683 to 1.4705. The current pace of the rally is quite steep with the market gaining almost .008 points per day, making 1.4683 a balance point. The main upside target today is a downtrending Gann angle at 1.4705.
On Friday, the Euro surged to the upside after the passing of a new aid package for Greece. Based on the strong surge earlier in the week and this morning’s developing weakness, it now appears that the news may have already been priced into the market.
In addition to the news about the aid package for Greece, traders also priced in the possibility of another interest rate hike by the European Central Bank at its July meeting. Traders expect the ECB to hint toward another rate hike when it meets on Thursday, June 9. Although it will not specifically say that another rate hike is a sure thing, it should provide market participants with enough hawkish information to drive up buying interest.
Despite this morning’s setback, the Euro’s uptrend is likely to continue simply because of the favorable interest rate differential. With the ECB strongly considering hiking rates and the Fed just getting around to ending its stimulus program, the Euro has no where else to go but up.
Of course, if the Euro Zone is surprised by any negative news from Spain, Portugal, Ireland or Greece regarding sovereign debt, then the trend may shift abruptly to down. However, with the passing of the Greece bailout, the stress that was triggering the Euro’s recent weakness has been lifted.
Technically, this morning’s closing price reversal top in the Euro is more indicative of profit-taking rather than a change in investor sentiment. In the worst case scenario, the June Euro may correct 50% to 61.8% of the last rally from 1.3963 to 1.4658. This would make 1.4311 to 1.4228 a potential downside target. With the fundamentals favoring a continued up move, investors should look for buyers in this area.
