I have been fielding quite a few questions regarding the rise in the EURUSD, and whether this is some sort of false rally or not, so I wanted to devote this morning’s Forex review to this topic.
First of all some facts. At 1.2400, the EURUSD has rallied 4.4% from its 1.1875 5 year lows that were set two weeks ago. But, when this 500+ pip move is compared to the overall drop since trading above 1.5000 last year, it is barely a 20% retracement (nothing too noteworthy for the technical analysis guys).
So will it fade out or not? As I have liked to mention in the past, it is important to try and decipher who the buyers and sellers are. When the EURUSD first began to gain traction above 1.2200, there was a lot of talk among Forex dealers that hedge funds were covering shorts. This week though, it appears that buying support has widened. This is based on the fact that we have seen few sharp spikes higher, which usually indicates rapid short covering. Also, as the chart below shoes, we have been hitting higher highs during the move up.
The above seems to indicate that we are ripe for a further rally. Nonetheless, I am still not convinced. First of all, I think the 1.2450 resistance level continues to be a major impediment for further advance. Also, when you compare the Euro against everything else, it is apparent that the Euro hasn’t been rallying across the board. As such, the EURGBP, and my favorite EURAUD are all around unchanged for the week. Even the EURJPY is only marginally higher. This seems to indicate that the EURUSD is benefitting from an overall rotation of Forex traders out of the dollar, rather than renewed optimism for the Euro. Therefore, if the current risk rally fades, than the Euro could be very vulnerable for a hit.
I am not ready to throw in the towel just yet on the EURUSD, but based on all the above, I think the best plan of action is to wait for that next wipe out selloff that hits stocks and currencies and see how the Euro reacts. If we see support hold, than it may indicate things are for real. I hope to keep updating this theory next week, especially with the FOMC Meeting occurring next Wednesday.