EUR/USD: Bulls, Don't Panic! Just A Correction, For Now...

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Includes: ERO
by: FXstreet

FXstreet.com (Barcelona) - The European shared currency has been losing some steam in the last 24 hours, with committed bulls unable to break the 1.3135 hurdle vs the U.S. Dollar, its first attempt since October 18.

Demand short of expectations at a Spanish bond auction, downbeat retail sales, and a S&P downgrade of Greece to selective default, all contributed to putting a dent in what is so far an inspiring rally by the Euro since mid November.

As Richard Lee, contributor at FXstreet.com, notes, "although official stats reveal solid demand for the Spanish debt offering -which came in at a 2.3 times offer, rising above the 1.8 times witnessed last time around - the auction fell short. The Treasury was only able to sell 4.3 billion euros in new Spanish debt vs 4.5 billion euros set by Treasury officials."

Euro in correction mode ahead of ECB

While the topside failure to clear 1.3135 resistance may spark some speculation over the Spanish government requesting a bailout within Q1 of 2013, for now, that may be an overstatement. Judging by the price behavior, the limited +50 pips fall in the EUR/USD from Wednesday only seems to indicate that we are witnessing a mere correction, unless 1.30 psychological level is taken out, which may imply larger number of sellers trying to jeopardize the continuation of the rally.

However, the EUR/USD spot price is poised to navigate through some 'limited' price disruptions as the European Central Bank meets to decide on its monetary policy. We use the term 'limited' as this month's monetary policy statement and accompanying press conference is expected to be mostly unchanged from the last in November.

Kathy Lien, co-founder at BKAssetManagement, notes: "When the ECB last met in November, Mario Draghi said he does not expect any major improvements in growth over the next year but more stimulus was not necessary because the availability of OMT has been enough to stabilize the financial markets and reduce bond yields. We don't expect his views to have changed especially since Spanish 10 year bonds are now yielding 5.382% down from 5.836% the last time the ECB met."

Meanwhile, Katarzyna Komorowska, FXstreet.com fundamental analyst, also sees little to no change in policies by the ECB, and comments that a threat of a rate cut is very low, saying that "despite recent hints that the ECB is considering carrying out another rate cut and signs of the eurozone entering a double-dip recession, the central bank is generally not expected to take action in December."

Ahead of the ECB meeting, the correction in the Euro has more chances than not to extend lower, says in-house chief strategist Valeria Bednarik, who suspects hourly candles will be able to respect the 20 SMA, currently acting as dynamic resistance. "As long as below 1.3100, the downside is favored with scope to test 1.300 ahead of ECB" Valeria states.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.