It was a volatile day for the EUR/USD, which was not surprising given the amount of economic data coming out of the U.S. during the previous session. To kick things off, we had Fed Chairman Bernanke's testimony in front of congress which started at 14:00GMT, which sent the EUR/USD on a roller coaster ride. Initially it traded as high as $1.2998 before sharply reversing all gains and closing down 53 pips at $1.2852. Later in the day, we received the the most recent FOMC meeting which gave the pair a small bounce but not near to recover from earlier losses.
According to analysts at NAB Global Markets, "investors looking for clues on U.S. monetary policy would have taken very different messages from Fed Chairman Bernanke's prepared testimony and his subsequent Q+A session. The formal presentation warned that, "a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further." Yet, in response to questions from Congressmen, we heard that, "If we see continued improvement and we have confidence that that's going to be sustained, then we could, in the next few meetings…take a step down in our pace of [asset] purchases."
It should also be noted the EUR/USD wasn't the only pair to sell off after comments, with the U.S. dollar going well bid across the board and the majority of 'risk on' assets including both stocks and commodities suffering declines. Although today was extremely volatile, look for action in the pair to again pick up during the next European session in which we will get a number of important EU PMI figures released start just before 7:00GMT. Should this 'risk off' market mentality across equities continue, it's hard imagine the EUR/USD having much luck with follow through to the upside in the coming sessions.
A large part of the recent sell-off in the euro was caused by concerns about the health of the eurozone economy - because the region is in recession, the ECB felt the need to ease monetary policy. If tomorrow's eurozone PMI numbers show improvement, then the hope for a brighter tomorrow will make $1.28 a near-term bottom.
Given the rise in equities, the slide in the euro and the rebound in industrial production and factory orders, we expect to see some improvements in the region's economy. Yet the data could still surprise to the downside and if it does, the EUR/USD could break below $1.28.
Given all the headline-driven trading expected, some analysts are looking at the shorter term time frame charts in order to find important developments and levels which may have influence on the pair in the coming European session.
The EUR/USD reached $1.2997 after Bernanke started his testimony with a dovish tone, only to sink to a daily low of $1.2832 before facing buying interest. The hourly chart shows price consolidating right above the level, with indicators aiming to correct extreme oversold readings and 20 SMA heading south above current price. In the 4 hours chart, a stronger bearish tone is developing, although $1.2800/40 area continues to attract buyers, and only a clear acceleration below these last will point for a stronger downward move.
From a longer-term perspective, both trending indicators (short-term moving averages) and the RSI (14) remain in bearish set up which could continue to limit advances the rest of the week. The weekly chart is still carving out a massive head & shoulders pattern, with the neckline located down near the $1.2770 area. Given the fact the pattern has been forming since early September 2012, market participants should not overlook the bearish influence it may have should we get confirmation on a closing basis.
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.