September Euro Vulnerable To Near-Term Correction

The September euro is trading lower overnight as traders expressed skepticism about European Central Bank policy actions. Last week the euro rebounded to finish higher for the week on the heels of positive comments from ECB President Mario Draghi. He vowed to do everything in his power to prevent a collapse of the eurozone. Shorts covered after the comments, triggering an impressive reversal on the weekly chart, but overnight investors are expressing concerns about his plan.

As reported in The Wall Street Journal on Friday, ECB President Mario Draghi wants to discuss purchases of sovereign bonds by the central bank, in tandem with the eurozone rescue fund. Others are saying he is considering another long-term financing operation. The uncertainty over which policy the ECB will choose is encouraging speculators to take profits following last week’s big run-up which is also allowing shorts to refresh their positions.

Although last week’s rally seemed to be suggesting that speculators are pricing in an ECB intervention, a consensus seems to be developing that the central bank will keep its policy stance unchanged at its next meeting on August 2. This is likely to dampen the current rally. One of the problems the central bank faces is the politics of renewing its purchase of Spanish and Italian Bonds.

Some feel that these bond purchases should be spread around to other nations facing similar sovereign debt issues. In defense of the ECB, however, it looks as if the financial markets have been more sensitive to the interest rate movements by both of these large eurozone members. In addition, financial collapses in one or both of these countries could have a more negative impact on the Euro Region as a whole.

Technically, the September euro daily chart indicates that last week’s rally has left it vulnerable to a near-term correction. Although the main trend turned up on the daily chart when the market crossed the swing top at 1.2335, it did it without much fanfare and the all-important follow-through rally. Last week’s high at 1.2397 also fell short of the major 50% price level at 1.2405.

The overnight action indicates the formation of a short-term range of 1.2051 to 1.2397. This has created a retracement zone at 1.2224 to 1.2183. This zone is likely to be the euro’s first downside target. Uptrending Gann angle resistance at 1.2211 creates a possible support cluster at 1.2224 to 1.2211 today. Short traders should watch for a possible technical bounce following a test of this cluster.

Since the height of the rally is often determined by the length of its base, bullish counter-trend traders will be trying to form a support base at or near this retracement zone. The first bottom may have cleared out weak shorts, but the formation of a secondary higher bottom will be sign that fresh buyers are showing up to support the euro.

So while it looks as if last week’s positive comments may have stabilized the euro at current price levels, it is going to take positive action by the ECB to actually change the trend on the longer-term charts. I don’t expect the euro to trade through 1.2051 this week unless interest rates sky-rocket in Spain or Italy, therefore, traders should look for the single-currency to straddle the retracement zone for most of the week. Price and time analysis suggests that 1.2191 to 1.2183 could be an important support cluster on August 2.