The EUR/USD gave us a head-fake to the topside yesterday, instead deciding to submit to the downward force of its trading range. The EUR/USD is fighting to stay above our 2nd tier uptrend line and previous bottom-end support of 1.4281 as investors digest the nearly -7% decline in China's SCI. The EUR/USD's inability to charge past our 4th tier downtrend line despite solid buy-side volume is a bit disconcerting. However, the EUR/USD continues to flex its relative strength after the EU's CPI Flash Estimate came in two basis points ahead of analyst expectations. The recovery in the EU's Flash CPI is a positive turn of events since spiraling prices have been the sore thumb in the EU's economic recovery. It will be interesting to see if the EU's PPI can register a similar stabilization once it rolls around. Even though the Flash CPI is showing improvement, EU prices continue to decline at a historic rate. However, today's reading could buy the ECB some more time as the central bank tries to avoid another injection of liquidity. The CPI number comes just in time since the ECB will be making a monetary policy decision on Thursday. Although analysts aren't expecting any further liquidity injections at this week's meeting, investors should still be on their toes since the ECB has been prone to deliver monetary shocks in the past. In fact, the ECB may be uncomfortable with the rate the Euro is appreciating against the Pound, and could be tempted to deliver a shock to depreciate the Euro a bit and level the playing field.
Meanwhile, the EUR/USD is right in the gut of the trading zone created by our trend lines. The EUR/USD is relaying the message of a consolidating S&P. However, should the S&P futures follow the SCI lower, the EUR/USD may have little choice but to drop back towards our 1st tier uptrend line. On the other hand, we don't expect that investors will send the EUR/USD through any significant technical areas until we receive the next couple sessions of EU data, including German Retail Sales and Unemployment Change on Tuesday and the EU's Revised GDP on Wednesday. If the EU's data comes in better than expected, investors may price in a neutral monetary stance at Thursday's ECB meeting by appreciating the Euro against the Dollar. We will see how the condition develops over the next 24-48 hours.
We still believe our 4th tier downtrend line plays an important role to the topside, and investors should keep in mind the currency pair has been experiencing more buy-side than sell-side activity as of late. A majority of the EU economic data has been outpacing analyst expectations except for prices, which registered an about face today. Therefore, there is little reason to be fundamentally negative on the EUR/USD right now. It would take a blatantly negative turn of events in both EU and U.S. economic data this week to send the EUR/USD tumbling below our first tier uptrend line. Even if the EUR/USD should decline below our 1st tier uptrend line, we can form several more trend lines beneath, not to mention the currency pair has its highly psychological 1.40 level hanging far below present price. As for the topside, our 4th tier downtrend line plays an important technical role along with 8/27 highs. Meanwhile, the EUR/USD is a leg up away from a substantial breakout since July highs are within reach.
Present Price: 1.4288
Resistances: 1.4297, 1.4310, 1.4327, 1.4340, 1.4360
Supports: 1.4281, 1.4262, 1.4254, 1.439, 1.4219
Psychological: 1.40, 1.45