Jean Claude Trichet’s hawkish statement yesterday concerning interest rates surprised the forex market, prompting a surge in the euro which gained over 300 pips against the US dollar before closing out at 1.3351 as a wide spread up candle on the daily chart. Yesterday’s session made it four straight days of gains for the eurusd, shaking out many euro shorts and making it both painful and expensive for euro bears at the moment. The question now, of course, is whether this bullish momentum is likely to continue and we are seeing the start of a significant move higher for the eur usd. For an answer we need to look more closely at the eurusd daily chart, the USD index chart as well as the broader market.
Starting with the fundamentals, Trichet’s comments were hardly surprising, given the strength of the German economy which is recovering at an impressive rate. Next, equity markets, a barometer of risk and ones that generally rise as the euro strengthens, remained relatively flat, and indeed both the FTSE 100 and the DOW 30 closed lower last night, clearly signalling that the reaction yesterday was overdone, and certainly not in line with the substance of the comments from Trichet. Finally, the ongoing sovereign debt issues have not disappeared, and nothing much has changed from the start of the week. So what are we to make of this sharp rise and apparent sudden love for the euro?
The answer is, actually quite straightforward: the forex market makers have used this as an opportunity to shake the euro bears out of their positions, marking the euro higher on the news and taking the EUR/USD back to the pervious high of the last few weeks, namely at 1.3498, where no doubt many short traders had placed their stops. In short (if you will parden the pun), yesterday was a stop hunting exercise and one to be ignored as this was clearly a trap up move in the market. This has been further confirmed in this morning’s trading which has seen the euro vs dollar hit a high of 1.3457 before pulling back to trade at 1.3345 the time of writing. Should this price action hold throughout today’s forex trading session then this will result in an excellent signal of a shooting star candle and a solid position to enter the market once again with further short positions, on the prospect of a longer term fall and a break back below the 200 day at 1.3066 in due course. Finally this morning’s pullback aligns with the current price resistance in the 1.3450 zone adding further weight to our analysis.
Turning to the USD index, this analysis is mirrored on the daily chart, as the index appears to be finding support at the 78.77 level, where we saw a previous bounce earlier in the month, as well as in mid December 2010. In both cases the index rallied higher from this level, and should we see a close with a hammer candle later today, then expect to see the index rally next week with a consequent fall in the EUR/USD as a result.