EUR/USD, Correction Dressed In Bear's Clothing?

Includes: ERO, EU, FXE
by: FXstreet

One of the best quotes from Jack Schwager's book Market Wizard cites the legendary currency trader Bruce Kovner as saying, "successful trainees are strong, independent, and contrary in the extreme."

The latter could be well applied to those that went long the euro on Wednesday, as despite all the noise surrounding the Italian politics and potential ramifications, the EUR/USD was the best performer as risk made an abrupt comeback.

There were some more optimistic reports out of the U.S. economy on pending home sales and core durable goods orders in January, while the Fed's Bernanke gave another pro-speech on how not to mess with the markets on the second day of his Congressional testimony.

Mr. Bernanke, again, said nothing new from what is already well-known, that is, bond purchases are here to stay for now, arguing that it has supported the economy. According to the team at NAB, "there was no sign of doing that anytime soon however with 2016 nominated by the Chairman before the jobless rate hits 6%."

The euro traded triumphant away from $1.30 to briefly penetrate the $1.3150 region in the last Asian session, and in the process, the currency successfully escaped comments from the ECB President Draghi who said the central bank is "far from having exit in mind", adding that bloc's economic outlook is still weak and easing policies are needed to invigorate growth prospects.

Kathy Lien, co-founder at BK Asset Management, notes: "The ECB and the Federal Reserve couldn't be further apart when it comes to exit strategies. Today, Bernanke said the central bank will need to start reviewing their exit strategy while the Draghi completely brushed off the idea. These differing views should be bearish for EUR/USD but as we have seen in today's price action, currency traders are not focused on the issue, and instead, the EUR/USD has followed U.S. equities higher.

Can the market continue to give the euro the benefit of the doubt and inflate it recovery further?

According to renowned FX educator and founder of 2ndSkies, Chris Capre, "the pair is now sitting a key role reversal level, but I'm not quite convinced this is the end of the short-term bull run, thus I'll look for price action signals higher at $1.3300 which was a key resistance that started the impulsive selling on Monday."

Chris outlook marries chief analyst Valeria Bednarik's view, who said "the short term outlook turned bullish", with "upward correction likely to continue, with $1.3300 area at sight" she said. A daily descendant trend line coming from $1.3710 should cap prices from rising higher, Valeria tips.

Fan Yang, head of currency analysts at FXTimes, also observes that "only a push above 1.33 should push away the bearish outlook". On the downside, the main target is $1.30 ahead of $1.2875, a key 50% retracement.

The bottom line seems to be that traders may still enjoy some further room to the upside until sellers find again a 'value area' to reinstate positions. However, as Kathy Lien notes, "as long as the makeup and policies of Italy's government is unclear, the euro will have a tough time recapturing $1.33 let alone $1.34 or $1.35", adding that "investors won't be rushing back into the European assets until they know what type of coalition is formed and whether new elections will need to be held."

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.