There aren’t very many technical indicators that I follow, being that I’m primarily a fundamental trader who likes to follow the trend. However, one technical formation that I’ve found to be relatively reliable is the MACD when it shows either a bullish or bearish divergence.

As it turns out, there is a pretty strong bullish divergence on the EUR/USD daily chart. As you can see, the euro made fresh lows back on June 4 and 7 while the MACD did not. Also, Friday was the fourth straight session that the euro has recorded a higher low and a higher high.

Looking ahead, if there really is to be a shift in euro sentiment, the 23.6 fib retracement at 1.2287 would be the next price target. One way to trade this would be to wait for a test of support at the 14.6 level on 1.2129 after a daily close above there. I’ve chosen to use this fib measurement because it represents what could be the last leg of euro decline for now.

There have been a number of positive fundamental developments in recent days that have broken the sharp downside momentum of the euro, but most important was the ECB’s promise (from the press conference on June 10 which followed the rate announcement) to provide unlimited liquidity over the next 3 months (the implication being that the ECB will extend the program if necessary). Also during the conference, Trichet said that the ECB will not issue debt certificates to absorb the excess liquidity generated by the sovereign bond purchases, an indication the ECB intends to increase the money supply. While normally a signal that a Central Bank is looking to depreciate, the move is likely to heighten risk appetite which generally works to the euro’s favor against the dollar. The ECB also revised up this year’s GDP forecast from 0.8% to 1.0%.

Additionally, Moody’s said that European banks can cope with the losses related to their holdings of peripheral euro zone bonds. German’s Bundesbank revised its GDP forecast for Germany to 1.9% this year from 1.6% while the German Constitutional Court rejected efforts to block Germany from participating in the guarantees that are a critical part of the EU Stabilization Mechanism. The consolidation of Spanish cajas continued ahead of the month-end deadline to draw on the government’s fund.

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