The Euro traded in a tight range on Monday despite overnight news which should’ve added a little volatility to the market. Today’s lackluster performance may have been caused by low volume as many traders may have chosen to stand on the sidelines until Friday when the European bank stress test results are scheduled to be released.
Throughout July, Euro traders have expressed concerns that the stress tests will not be transparent enough to yield any significant data. Some traders feel that the test specifications were not rigid enough to reveal anything of value. Throughout the process there was a rumor circulating that at least eleven banks may have failed the test. The market hardly reacted to this news. European Central Bank President Jean Claude Trichet did mention two weeks ago that some banks will have to raise capital; this statement also failed to stop the Euro rally.
Based on today’s action, it looks as if investors are more likely to keep the Euro in a range rather than take a side in the market. The current rally may remain intact also as some traders are beginning to believe that the Euro Zone may outpace the U.S. during the second half of the year. At present it seems that the Fed is going to have to keep interest rates low until the end of the year and may also be considering new stimulus programs. In the meantime, the ECB appears to have stabilized the European sovereign debt problems while calling for a faster recovery than previously estimated.
Early in the trading session the Euro looked strong, having waved off the overnight bearishness created by a downgrade of Irish debt and communication problems between the International Monetary Fund and Hungary. A decline in the U.S. National Homebuilders Association Confidence Index also triggered a rally, but traders were unable to take out Friday’s high at 1.3006, prompting a profit-taking break. Throughout the day the Euro was wavering but remained positive.
Technically, Friday’s closing price reversal top was confirmed overnight, but there was very little follow-through to the downside. This type of formation usually triggers a 2 to 3 day break of as much as 50% of the last major swing up. Traders should watch for late session weakness to reaffirm the reversal top. A trade through 1.3006 will negate the formation.
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