Mid-Day Report: Euro's Weakness Continues as a Short Term Top Formed

Market Overview | Written by ActionForex.com | Dec 19 08 13:35 GMT |

Euro continues to pare this week's gain today and weakens sharply across the board. While there are various stories about the reversal of fortune in Euro, it's believed that the main reason is due to ECB's announcement of widening the rate corridor yesterday. Note that Euro is the main beneficiary of dollar's weakness since the start of the month due to fund flows from US to the Eurozone. However, ECB's announcement, which involved lowering the deposit rate from 2.00% to 1.50%, 100bps below the benchmark interest rates currently at 2.50% and raising the marginal lending rate from 3.00% to 3.50%, 100bps above the benchmark rates, is viewed as an intention to discourage capital inflows to park with ECB. Traders, thus, take profit on Euro longs on concern of reversal in the trend.

Technically speaking, a short term top is confirmed to be formed at 1.4719 in EUR/USD. While some more downside is expected in near term, there is no confirmation of EUR/USD's rally yet. Focus will turn to 1.3408 support for guidance. Similarly, dollar index's break of 80.44 confirms that a short term bottom is in place at 77.69 after drawing support from 61.8% retracement of 71.31 to 88.46 at 77.86. We're favoring the case that fall from 88.46 is merely a correction in the larger up trend. However, a break of 83.11 cluster resistance (50% retracement of 88.46 to 77.69 at 83.07) is needed to firstly confirm the completion and corrective nature of such decline first.

On the data front, Canadian CPI dropped -0.3% mom, rose 2.0% yoy in Nov versus consensus of -0.5% mom, 1.8% yoy. Core CPI rose 0.7% mom, 2.4% yoy versus consensus of -0.2% mom, 1.5% yoy. Germany PPI dropped -1.5% mom, rose 5.3% yoy versus consensus of -1.0% mom, 5.9% yoy. Japan's all industry index dropped 0.5% mom in October, above market expectation of -0.8% following a revised reading of -0.1% in September. In the UK, December Gfk consumer confidence unexpectedly improved to -33 from -35 as tax reduction and lower energy costs stimulated spending desires.

Bank of Japan cut the overnight lending rate from 0.3% to 0.1% on 7-1 vote and announced plan to buy corporate debts to help corporate raise funds during deepening recession. Tado Noda was the sole member to dissent. Basic loan rate was also lowered by 20bps to 0.3% by unanimous vote.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.4042; (P) 1.4380; (R1) 1.4580; More

EUR/USD's break of 1.4008 minor support with 4 hours MACD dragged below signal line confirms that a short term top in place at 1.4719, after meeting mentioned target of 61.8% retracement of 1.6038 to 1.2329 at 1.4621. Intraday bias is flipped back to the downside for 4 hours 55 EMA (now at 1.3685) first. On the upside, above 1.4306 will indicate that fall from 1.4719 has completed and flip intraday bias back to the upside for retesting 1.4719 high.

In the bigger picture, whole fall from 1.6038 has made a medium term bottom at 1.2329. Strong rebound from there has met mentioned resistance zone of 1.4621 fibo resistance and 1.4867 already. With a short term top in place, focus now turns to 1.3408 cluster support (61.8% retracement of 1.2549 to 1.4719 at 1.3378). Break there will indicate that rise from 1.2549, as well as that from 1.2329 has finished. In such case, deep decline could be seen to retest 1.2329 low. On the upside, note that sustained trading above 1.4867 will target 1.6038 record high again.