It may seem as though the EUR/USD overreacted after selling off from previous weekly highs on Friday following news on Cyprus bail out details, which led the pair to massively gap lower from above the $1.3070 level to fresh 3-month lows at $1.2880 Monday. However, the reality is that the pair continues well capped so far below $1.30.
EUR/USD may have overreacted on the Cyprus-induced selling, that is true, but the recovery has not been very bullish either, especially noting that according to the latest COT report, the net short side of the trade is mostly held by speculative positions. These players typically would not give up that easily once the market is moving in their favor.
"The EUR has recovered as the market presumes the Cyprus bailout will not have a sustained contagion. However, the EUR remains lower than its range on Friday in a down-trend," said Greg Gibbs, FX strategist at RBS.
The analyst suggests that "if the EUR does not shrug-off this Cyprus event, its recent gradual decent in sentiment will start to turn more decisively negative" he adds.
However, let's not forget that according to the latest Reuters poll on EUR/USD, RBS is the most bearish bank among the 59 participants in the survey, with a 1-month target at $1.2750. That being said, RBS remains the top forecaster in the list, according to Reuters criteria.
Since every risk event navigates around the Cyprus bail out conditions, "the ECB said it will provide the necessary liquidity if the Parliament approves the depositor-levy, so look out for a potential spike in the EURUSD after the Parliament's announcement especially if there is a noticeable reduction in the burden on smaller depositors (below €20,000)," noted CitiFX analyst Ashraf Laidi, ahead of an expected Cyprus parliament vote scheduled.
Initially, the vote was scheduled to take place on Tuesday, however, amid the ongoing drama, the Cypriot President Nicos Anastasiades canceled the vote, with the replacing date still to be confirmed. At this moment, the fluid situation may lead to re-schedule the vote for today, as some reports suggest, or delays may extend until Thursday, according to other headlines.
Ahead of the Tuesday session, the EUR/USD has been pretty much muted around the $1.2950, understandable also given the big risk events coming as soon as 10:00 GMT in the form of German ZEW Economic sentiment, followed by U.S. building permits at 12:30 GMT, and Wednesday's FOMC and Fed's Bernanke press conference.
"At this point," CMT and FXstreet.com Independent Analyst Fan Yang notes that "a return above $1.31 should warn of a relief rally, but a break above $1.3160 will be needed to establish a bottom", adding that "otherwise, if the market holds below $1.30, the next support is in the $1.2660-$1.2680 area."
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