Forex Technical Update
The EUR/USD broke above a double bottom in Tuesday's US session, but stalled near 1.3650 and came back to test the broken resistance as support in the 1.3550-1.3560 zone. The bearish price action was seen decelerating as it tested this zone, and the reaction was a bounce that had relatively more strength than the decline. This confirms respect of the double bottom, and suggests at least another leg in the current correction rally. The 1.37 level is the next test, as the market gear up for the US session. It is near 78.6% retracement of the decline since the FOMC announced operation twist. It's not about that this week, as the market has been riding a wave of optimism, or at least a wave of non-pessimism and panic surrounding the European debt crisis.
The 1.37 level is also a psychological pivot, as well as just below a real pivot seen in last week's price action. (refer to 4H chart). Note the engulfing bullish candle that is leading toward it. The real pivot area is more like 1.3710-1.3715. Above 1.3715, the market opens up the 1.3950 pivot. This is near 50% retracement of the entire bear run since August 29, near 1.4550. Not marked in the 4H chart, but a swing projection using the first leg up in this correction rally pivoted from the 1.3550 support targets 1.39. So there you have it, if the market pushes the price above 1.37, and RSI in the 1H chart goes above 70, while RSI in the 4H chart pushes above 60, we open up 1.39 and more aggressively 1.3950. This scenario becomes clearer if after the subsequent break above 1.37, 1.3650 is tested and established as support.
European Financial Stability Facility (EFSF): The event risk that can either support this current optimism or hamper is likely the German parliamentary vote on September 29, due to ratify changes to the EFSF (agreed upon July 21). The Austrian parliament will vote for these changes Friday, Sept 30, and wrap up the week in risk events regarding the condition of the rescue fund for the European debt crisis.
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Fan Yang CMT
Chief Technical Strategist