EUR/USD On Course To Test 1.3435

The euro is posting a strong gain versus the dollar after earlier weakness. Intraday charts reversed to the upside on Monday after U.S. Federal Reserve Chairman Ben Bernanke warned that faster economic growth was needed to improve the country’s employment outlook.

In a speech to the National Association for Business Economics, Bernanke greenlit Monday’s rally when he expressed uncertainty that recent improvement in the labor market can be sustained.

His comment may have given traders the clarity they were looking for after weeks of searching for clues to prospects for further monetary stimulus measures by the central bank. For weeks the U.S. dollar had been trading almost sideways due to speculation that Fed officials would refrain from further stimulus.

Earlier in the month and prior to the release of weaker than expected U.S. inflation data, longer-term interest rates began to rise as traders began to factor in the possibility that the Fed would raise interest rates sooner than expected.

Today’s comments all but destroyed the hopes of bullish dollar traders who had positioned themselves for a stronger Greenback. Using the word “accommodative” several times, Mr. Bernanke erased almost all doubt that the Fed would stay its course and keep the current stimulus in place while leaving the door open for further incentives if the economy continued to weaken.

From a longer-term perspective, the Fed may shift gears later in the year if inflation becomes an issue. This condition may force it to begin tightening by the end of 2012. This will help to underpin the dollar, but over the short-run it looks as if the Greenback is going to trade lower.

Despite today’s breakout to the upside, euro traders may see gains limited over the near-term if Spain’s sovereign debt issues resurface and contagion fears reignite. This situation should be watch closely because the euro can turn down just as fast as it turned up on Monday morning.

Technically, the EUR/USD broke through Fibonacci level resistance at 1.3301 to trigger a strong surge to the upside. This price is now the new support along with an uptrending Gann angle at 1.3283. This aggressive buying sets up a potential rally into a downtrending Gann angle at 1.3380.

From a longer-term perspective, Monday’s rally also put the EUR/USD on course to retrace at least 50 percent of the break from late October to January. This range is 1.4247 to 1.2623 and the first upside target is 1.3435.

In summary, Bernanke’s comments could be setting a bullish tone over the short-run; however, traders should not expect to see a vertical breakout similar to Monday’s move. The trend is pointing higher, but traders have to continue to be aware that issues in Spain could derail the rally at anytime.