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Euro Drop Signals a Top is in Place

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May 12, 2014 By: , No Comments

European-Cental-Bank-247x170

Forex markets saw some surprising activity last week, but this largely depended on which specific pairs you were watching.  For example, those looking to establish carry trade positions, the slowing activity was something similar to watching paint dry.  The USD/JPY forex pair has slowed to a near stand-still as we trade near the bottom end of the monthly range.  Support now rests in the 101.50 zone, which is an area where multiple bottoms have already been posted.  Most traders are looking to use this area as a pivot point, with a downside break being the first signal to start selling.

In contrast, the EUR/USD saw some enhanced volatility into the end of the week as central bank expectations continue to weigh on the outlook for the European shared currency.  From a fundamental perspective, there are many traders that would argue these types of downside moves are long overdue.  There is still building evidence that the Euro area has not fully emerged from its sovereign debt crisis that was claiming all the headlines just a few years back.  And when we look at the comparative performance outlook (relative to the US), there is very little reason to get excited about the Euro currency.

The Week Ahead in Forex Markets:  Watch For Building Bearish Trends

In the week ahead, forex traders will determine whether or not the latest activity in the Euro is a short term (profit taking) blip, or the beginning of a much larger trend.  The forceful nature of the moves last week suggests that the latter scenario is still a clear possibility.  Earlier in the month, those bullish on the Euro were looking for the psychological level at 1.40 to finally break.  We did see limited pullbacks from this area, so there was some technical scope to argue that this might actually occur.

Last week’s failure just ahead of this area, however, was forceful and we are now dealing with critical medium term support in the 1.3750 region.  We have not yet seen a clear break of this area so there is still some bullish hope for a bounce.  Probability suggests, however, that this is unlikely so traders will now be waiting for a clear break of 1.3750 to start establishing breakout positions to the downside.

For this reason, next week’s price action in the EUR/USD will probably define the overall trajectory that will likely be seen for the rest of this month.  Since this is a forex pair that is denominated in Dollars, it will also have a major influence on the other pairs (for example, the GBP/USD and AUD/USD).  Contrarian traders might use this latest bear run as a basis for new sell positions but if this is done it will be important to keep stop losses relatively tight as momentum could easily start building from here.

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