September Euro: Two Charts, Two Trends

The September Euro is expected to close higher for the week after posting a notable mid-week turnaround. On July 24 the Euro reached its low for the week at 1.2051, but it was the trading action the next two days that put the single-currency in a strong position to finish higher for the week.

A closing price reversal bottom often leads to a 50% retracement of the last down move, but it does not mean the trend has changed. Based on the break from 1.2759 to 1.2051, traders can look for a retracement to 1.2405 to 1.2489 over the near-term. This doesn’t sound like a big move, but the fundamentals are still overwhelmingly bearish, and it is going to take more than a couple of friendly comments from European Central Bank officials to chase the large number of shorts out of the market.

In addition to the retracement zone, downtrending resistance comes in at 1.2365 and 1.2711. These two angles extend down from tops formed in 2011 and represent key resistance levels. Finally, the main trend is down and will not turn up on the weekly chart until 1.2759 is broken.

Despite the bearish outlook on the weekly chart, the move on the daily chart was impressive this week. It may not reflect new long positions yet, but the move does suggest that this week’s key news events caught the eyes of short-traders looking for any excuse to book some profits following a prolonged down move in terms of price and time.

Fundamentally, two key comments from top ECB officials helped ignite then fuel the rapid reversal. Following four consecutive days of lower closes, the Euro moved higher on Wednesday after ECB council member Ewald Nowotny said some members favor granting the Euro Zone’s rescue fund a banking license.

Granting a banking license to Europe’s rescue fund would give it direct access to ECB lending which would open the door to additional lending if the 500 billion Euro cash reserves prove too small to bailout Spain, Italy and any other nations seeking additional aid.

Thursday was a risk-on trading day in the financial markets with higher-risk assets soaring along with the Euro. The single-currency surged after European Central Bank President Mario Draghi vowed that the central bank would do everything in its power to support the euro.

Early in the trading session, Draghi said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Speaking at a conference in London, he further added “Believe me it will be enough.”

Based on the drop in bond yields in Spain and Italy after the comment was made, it looks as if the ECB is poised to resume purchases of bonds from these struggling nations. Moving forward, the key to further upside action will be determining what Draghi means by “mandate”. Although shorts-covered on the initial news sending the September Euro sharply higher, the fundamentals will remain bearish until something more concrete takes place. This means that investors will be looking for some clarification of this comment at a later date.

Although the daily chart is showing a surge to the upside, investors should keep in mind the weekly chart is controlling the trend and it is going to take a lot more than commentary to turn the trend up on that chart.