The Euro recovered into the close after testing the low for the year at 1.2143. If this low holds, then it will mean that last week’s reversal bottom is still intact while indicating that buyers have stepped in to support the currency.
The best sign that a bottom is being formed and that today’s action was a successful test of the low was the regaining of the Fibonacci retracement level at 1.2345. Holding this level could trigger a further rally to the 50% price at 1.2407. Building a fresh support base in this price zone will be a sign of higher markets to follow, but the main trend will not change to up until 1.2671 is taken out.
A break though 1.2143 will indicate that further downside movement is likely with the early 2006 price at 1.1825 the next likely downside target.
The main catalyst behind the weakness in the Euro this morning was concern that Europe’s sovereign debt issues were spreading, threatening the global economic recovery.
Traders have been selling the EUR USD since early Sunday evening when Spain took over a struggling financial institution. The move accelerated to the downside after the International Monetary Fund said Spain has been too slow to strengthen its banking system. This statement by the IMF helped create uncertainty in the market leading to the current sell-off.
Technically, the Euro is oversold, but it is going to take an easing of concerns in the Euro Zone before any of these oversold indicators will have any relevance.
Tuesday’s action was the first sign that actual buyers may have entered the market. This usually happens after the type of reversal we saw last week. Following a prolonged move down in terms of price and time, the first leg up is usually short-covering. The first leg up is 1.2143 to 1.2671. Following a test of a retracement zone or the actual bottom, the next leg up is usually new buyers.
At this time, oversold conditions are battling the bearish fundamentals. In other words, traders know the fundamentals are bearish, but can’t seem to muster up the courage to short this market again and again at such extremely low levels. Since the Euro is in a long-term decline, traders must get used to the possibility of whip-saw conditions at times while facing huge retracements.
Watch for the Euro to try to build a base between 1.2407 to 1.2345 then make a run at 1.2671. A breakout over this level is likely to trigger a massive short-covering rally to about 1.2917.
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