EUR/USD: turn of the tide

With its break beneath the bullish trendline and the MA-200, EUR/USD “officially” ended its rally and went into decline. The daily chart formed a rather lopsided double top, with the second top spiking through resistance at 1.5100. However, EUR/USD bulls could not hold those gains and the price action broke south. The throat of the double top lay at 1.4675, a support level that held for three trading days, but on 11 December 2009 that support gave way and the price action continued falling.

The MA-200 served as a pivot point, stopping the fall long enough to set a reaction low and guiding the price action into a retraction back to the new, bearish trendline. But on 20 January 2010 that support also gave way and the fall renewed. Minor support at 1.4030 also held briefly, serving as a profit-taking stage, but the fall resumed and continues, as shown on the daily chart, below:

Measuring Fibonacci levels on the greater detail of the four-hour chart shows that the month-long pivot about the MA-200 formed a retracement to the 38.2% line at 1.4570, which also coincided with the touch of the new, bearish trendline, below:

Note that the MA-200 lines appear different on the two charts. This should not be surprising, as one is measured on the prices of 200 days and the other on 200 four-hour time periods, giving two different lines entirely.

Also note that, on the four-hour chart, the MA-200 roughly parallels the bearish trendline, another confirmation of the change in trend.

Turning the Fibonacci indicator about gives a target for the short trade at the 161.8% level, in this instance at 1.3647, below:

Note that there is a support level at 1.3750 before reaching the 161.8% target, which may serve as another take-profit stage for some traders.

The underlying fundamental dynamic of this trade is the scramble of the “Club Debt” nations of Portugal, Greece, Ireland, and Spain to balance their budgets while their bond spreads widen over Germany’s. The announcement of a bailout plan, particularly for Greece, short-circuits that dynamic and could end this trade early.

Event risks in the week that could influence this trade include:

The ECB interest rate decision, 4 February 2010, 12:45 PM GMT (11:45 PM Canberra time). No change is expected to the interest rate of 1.0%, certainly not with peripheral bond spreads widening as they are. However, pundits will parse the following press announcement for hints of when the ECB will begin tightening monetary policy, or for any indication of financial assistance for Greece.

The U.S. January change in nonfarm payrolls and the unemployment rate, 5 February, 1:30 PM GMT (6 February, 12:30 AM Canberra time). Some in the market are optimistically looking for a positive payrolls report with 20K jobs created and the unemployment rate holding steady at 10.0%. With major layoffs recently announced by employers including Verizon and Wal-Mart (Sam’s Club) that doesn’t seem truly likely.