Forex: EUR/USD Consolidates Below 1.3450 After Being Slapped Above 1.3500

Includes: FXE, FXY, UDN, UUP
by: FXstreet

After a shy attempt above 1.3500, the EUR/USD was slapped at 1.3520 and launched to a minimum of 1.3425, where the pair found support. The bloc currency is closing the North American session in negative territory on Wednesday, extending its consolidation pattern around the comfort zone in the mid 1.34s.

Overall, sentiment continues to be bearish in the euro field. The EUR/USD lacked in conviction and came under pressure after Portugal's Prime Minister, Pedro Passos Coelho, said unemployment figures are worrying, and verbal interventions such as European Union Commissioner for Economic and Monetary Affairs Olli Rehn saying that eurozone growth will only turn positive in H2 2013.

In the UK, the pound tumbled after BoE Governor Mervyn King said the bank is unlikely to begin tightening monetary policy soon, arguing that such a move could derail a fragile economic recovery. In America, U.S. Retail sales posted a weak 0.1% increase in January, however, it was the third straight positive week. The alarm came from the bonds market, where the U.S. 10-year bond was sold above 2% for the first time in a year.

EUR/USD Confirming Cap

In a recent report, UBS' analyst team states that the cap on EUR/USD is confirmed. The bank pointed out that "ECB head Mario Draghi capped the rise with statements in the Deutsche Bild-Zeitung that were similar to statements made at the press conference last Thursday. "A pronounced rise of the euro would significantly hurt the growth outlook in peripheral countries and question their efforts to consolidate their finances," they commented.

Along this line, Wells Fargo Currency Strategist Nick Bennenbroek says that the greenback is weaker with focus on international developments. "The euro was firm early on, but has reversed course after unsourced reports by a German newspaper said the ECB is concerned a strong currency could hurt the competitiveness of the Southern European countries. The yen is steady, reversing earlier intraday losses. In addition to firm Japanese data, the G7 statement on exchange rates has potentially removed some of the downside momentum from the Japanese currency," he said.

EUR/USD's rejection from the 1.3520 area and subsequent drop below 1.3500 have turned the cross' outlook negative in the short-term. With immediate support at 1.3425 (intraday low), there is scope to a steeper decline with 1.3400/10 as next target. Below the latter, the pair could fall toward 1.3308 (38.2% retracement of the 1.2660/1.3710 rally) with not much in the way.

The pair is losing 0.05% at 1.3450, and a dip below 1.3428 (low February 13) would aim for 1.3364 (low February 12) and finally 1.3325 (low February 11). On the flip side, a breakout of 1.3437 (MA21d) would expose 1.3489 (MA10d) en route to 1.3520 (high February 13).

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