Forex: The EUR/USD Closes The Week With A 1.3000 Test On Cyprus 'Algo'

Includes: FXE, UDN, UUP
by: FXstreet

Finally, the EUR/USD has closed the week with a new test at 1.3000 on the back of the latest developments in Cyprus. After a week of providing drama, Cyprus has approved 9 bills as a first step to get the EU bailout. Now they are pretending to be an efficient parliament while building a credible plan B that Cyprus must show in a new eurogroup meeting on Sunday.

"Is Cyprus just a road bump?" asked BK Asset Management's analyst Kathy Lien, pointing out that "currencies and equities traded higher today on the hope that the problems in Cyprus will prove to be only a minor road bump in the long road to recovery for the eurozone and the global economy."

Late Friday, the Cypriot Parliament approved bills on solidarity funds and capital control, but delayed the vote on the levy to next Saturday, and with the EU group meeting in Brussels on Sunday, next week opening could again start with gaps all across the board. According to Valeria Bednarik, "the EUR/USD has reflected investors' sensitiveness to news this Friday, moving on headlines rather than on technical readings. And the pair will likely remain headline-leaded next week. However, the pair was unable to break above a daily descendant trend line coming from 1.3710, currently around 1.3010, daily high, and without a break higher, there's little room for advances."

She also adds: "daily charts maintain a strong bearish tone, and whatever the outcome of the current crisis, the fact is that the European situation is far from optimistic. Technical readings reflect this: upward movements may extend up to 1.3140, this month's high if the outcome is positive, thus selling interest around the level should halt the advance. Renewed selling pressure below the 1.2840/80 price zone, on the other hand, will only support the dominant trend and favor a bearish continuation with past November 2012 monthly low at 1.2660 then in sight."

From a technical point of view, the EUR/USD had a pretty uneventful day, a situation that extended, in fact, since the week started. 1.2880 has proved to be a strong static support level as the pair managed to bounce higher from there over the last few days, although sellers remain aligned in the 1.3000, confining the pair to a tight range.

Heat Map euro dollar

Nomura strategist Saeed Amen questioned in a recent report the current trend and pointed out the possibility of the EUR/USD to see upside ahead. Amen commented that spot has repeatedly failed to break below the 20D SMA, which suggests that there is important support on the downside. Further, he notes that bandwidth has also fallen significantly, suggesting that spot is likely to range. He writes, "Hence, spot is likely to retrace within the range higher. Also the RSI appears to have bottomed out, suggesting it has reached a short-term low. Our target is 1.3020 (above 20D SMA)."

On the other hand, Lee Hardman, FX Strategist at the Bank of Tokyo Mitsubishi UFJ. noted that the euro has been undermined by the release of the much weaker than expected eurozone PMI surveys for March. "The biggest surprise in the March readings was the drop in business confidence in Germany, dampening hopes that the German economy will help lift the rest of the eurozone out of recession." As for the effect on the EUR/USD, Hardman states that "the increasing likelihood of a more prolonged euro-zone recession supports our view that the ECB may ease monetary policy further later this year helping to lower the euro."

Just a reminder, early this week, UBS cut its EUR/USD forecast for the 1-month to 1.30 from 1.37 expected before and 3-month to 1.28 from 1.30 as the Italian elections and Cypriot problem "suggest the eurozone debt crisis is set to weigh on the euro again." Rabobank 3-month target is 1.2800 and the Goldman Sachs 3-month forecast has been reviewed to 1.3600 from 1.4000. However, according to the Forecast poll, the EUR/USD sentiment remains neutral around 1.3000 despite Cyprus and Italy.

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.