It was a rough week for the EUR/USD, as continued speculation of the Fed tapering QE purchases and worries of economic growth in Europe continued to put pressure on the pair throughout the week. When all was said and done, the pair finished the week down 0.90% to close at $1.2838. Market participants will be focusing on a number reports this week including testimony from Fed Chairman Bernanke, as well as speeches by some regional Fed officials.
the market will be looking closely at the Fed commentary this week. Bernanke's testimony to Congress on Wednesday is the main focal point, but there are important speeches by doves Evans and Dudley before then. As key supporters of maintaining the current $85 billion pace of asset purchases, any shift in their tone will be seen as evidence that the consensus and Bernanke's views have shifted.
He went on to add,
the commentary by Fed Watcher Hilsenrath just over a week ago and by a Fed dove Williams on Thursday last week has got the market thinking about potential for QE tapering in the summer, which puts into play the 19 June, 31 July or 18 September meetings. The June meeting includes a Bernanke press conference and staff projects, as does the September meeting.
Other analysts share the same view, and are quick to point out recent action in the equity and Treasury markets can be used for further confirmation to help make up a constructive view on the U.S. dollar.
According to Kathy Lien of BK Asset Management,
the strength of the dollar is a reflection of the market's optimism towards the U.S. economy because the move is confirmed by the performance of equities and Treasuries. Another way to look at it, however, is that investors are buying U.S. dollars because they don't see any better opportunities. The monetary policies of the ECB and the BoJ pose a threat to the value of the EUR and JPY, whereas the next move by the Fed should support the dollar. Capital preservation is just as important as capital appreciation these days and for this reason the direction of monetary policy and the implications for the currency have become so important.
The EUR/USD opened the week slightly higher, aiming to get rid of the short term negative tone, as the hourly chart shows price heading higher nearing a bearish 20 SMA while indicators head higher and approach their midlines, still in negative territory. An upward correction seems possible, as bigger time frames present the same technical picture, although steady gains above $1.2880/90 area are required to confirm further advances today, with scope to test $1.2950 price zone."
Furthermore, on the longer term time frames, the pair continues to build on the bearish developments which have been becoming much more obvious in recent weeks. For example, closing below the bottom of the six week trading range (May 10th) was the first sign that technical weakness was becoming apparent. Often times this type of development is part of a bigger pattern and can be viewed more clearly on the longer term time frames.
The EUR/USD is a great example of this, as it appears to be forming a massive head & shoulders pattern which has a neckline support down near $1.2770. This pattern has been developing since early September 2012, and should not be overlooked as longer-term measured move targets are located down near $1.1830. Of course, the pattern itself hinges on a weekly close below the neckline (noted above at $1.2770) to be confirmed