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EURO Breaks Out! But to the Downside! – August 24, 2010

Good day FX friends! Here’s an update on the EURUSD which I posted last August 17 (please see my previous blog here). In that post, I mentioned the possibility of the euro breaking out to the upside. It turns out that I was wrong as the EUR, instead of moving north, slid and broke down. As you can see from its chart, it appears that the euro’s recent rally over the greenback is over. After breaking out from an inverted head and shoulders pattern, the fiber or the EURUSD pair managed to achieve its minimum target and more. It then continued to rise and it even marked a new 3-month high at 1.3334 before dipping again. After its drastic slide from its 3-month high I though that it would reverse and turn up as suggested by what appeared to be another inverted head and shoulders. However, a break out from this pattern did not materialize. Its price then formed a head and shoulders (bearish and not to be mistaken with the inverted version) pattern. Its price action during the first days of this week proved costly as it pierced through and below its uptrend line and the formation’s neckline. Given this, the pair could now fall all the way to the 1.2150 area. Even if it rallies, the head and shoulders neckline at 1.2750 would prevent it from rising any further.

The euro lost its appeal on fears over Europe’s economy. The services PMI of France, manufacturing PMI of Germany, and the euro zone’s overall manufacturing purchasing manager index all failed to meet the market’s consensus. The French services PMI fell to 59.9 (versus 60.7) from 61.1. Germany’s manufacturing index also weakened to 58.2 from 61.2 which resulted into a broader fall in the euro zone’s number to 55.0 from 56.7. Note that the index can be used to gauge the business activity of the respective sectors in the economy. Why? Well, purchasing managers hold perhaps the most current and relevant insight into company’s view of the economy. For example, if the company is starting to pile up their invetory then perhaps it is expecting a uptick in its business in the near future. In any case, a drop in these figures suggests that the recovery in the euro zone’s economy could have slowed down.

On tap on August 25 and 26, respectively, are the German Ifo business climate index and the GfK German consumer climate index. Ifo’s account is seen to have retreated to 105.8 from 106.2 while the GfK index is projected to have increased to 4.1 from 3.9. But given the weaker-than-expected PMIs in the euro zone and the recent tentativeness in the global markets, business climate in Germany and the euro zone could have dipped as well.Such could very well reflect in the upcoming business and consumer climate surveys. If this is the case then the euro could once again take another hit.

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