Euro Outlook: Are You Having Fun Yet?

“Prices, like everything else, move along the line of least resistance.

They will do whatever comes easiest. ” Jesse Livermore

The first week of a month is often a fun filled time in the market. This week starts off not only October, and the third quarter of 2012 (I know right, where did this year go) but also the last full month before the U.S. presidential elections.

For those of us as passionate about politics as they are about the financial markets, October should be a dynamic month. I would expect the markets to be oversensitive to news events and I will be especially weary of unexpected news to give added instability.

RISK ON, RISK OFF
The old tone of risk on verses risk off should be very much alive. Earlier today, we saw the unemployment rate in the euro zone come out unchanged, Britain’s PMI underperform expectations and the US PMI beat expectations by 1.7 points.

EYE ON FOMC, JOBS DATA THIS WEEK
This week culminates with the FOMC minutes this Thursday, where the Fed will likely tell us their new asset purchasing program needs more time to really drive unemployment down – while completely ignoring the structural issues in the lending industry – as I can hardly remember a time where mortgage rates weren’t making new record lows. Friday we wrap things up with the U.S. unemployment rate and the monthly employment change.

Remember, look for better or worse than expected news to drive markets on that aforementioned risk tone. It will be interesting to see what subtexts will be surface this month. Remember, September saw the unemployment rate unexpectedly drop 0.2% (risk on) only to find out later that this was due to nearly half a million people “dropping out” of the labor force (risk off – and not nearly as well reported).

KEY QUESTION
Ask yourself: if the U.S. labor market is genuinely improving, why would the Fed be pumping $40 billion a month into the mortgage markets on an open ended basis? In my opinion, this is more an act of desperation than one of addressing the issues.

THE CHART
The euro is respecting the levels I mentioned last week very nicely. We are still consolidating within this bull flag/downtrend. Last Friday, we first touched the 200-day moving average (MA), and this has acted as good support. This level coincides with a 50% fib retracement of the most recent minor swing move higher (from 1.248 to the highs at 1.3168).

As I discussed last week, we won’t know what this consolidation means until it’s broken, but from a technical standpoint, we can identify levels to trade towards, or use as bounce entries. Last night was a great time to enter this pair long as we had this moving average, fib and trendline convergence. We’ve seen over 130 pips from last night’s low.

KEY LEVELS
If we convincingly break the upper boarder of this consolidation pattern we’re currently playing with, we may look for Fibonacci retracements of the consolidation as targets. 1.2964, 1.3300 and 1.3050 should provide resistance. Of course if we break the highs at 1.3168 look for Fib extension towards 1.332 for further resistance, but I doubt this is in the cards this week. On the downside look again for 1.2842, recent hourly lows, and the 200-day moving average for support.