EUR/USD Reverses from our 3rd Tier Downtrend Line

By Fast Brokers – The EUR/USD is losing yesterday’s positive momentum after employment data from both the EU and U.S. showed rising unemployment continues to be a thorn in the side of the economic recovery.  The EU’s unemployment rate came in at 9.5%, two basis points above analyst expectations, while the previous release was revised upwards by one basis point.  As for the U.S., America’s unemployment was also reported at 9.5%, a basis point below analyst expectations.  However, its non-farm employment change was much lower than anticipated (-467k vs. -360k).  Additionally, weekly unemployment claims remain at a 600k+ level with average hourly earnings dropping to a flat 0.0%.  Although the global economic stimulus packages have helped boost production and manufacturing, job creation in both the EU and U.S. hasn’t benefited as much as governments had hoped.  The bleak state of unemployment is dragging on the EUR/USD due to the negative reaction of U.S. equities and crude.  The EUR/USD is positively correlated with the S&P futures, so investors should monitor the S&P and its interaction with its highly psychological 900 level.  We suspect volatility may remain high throughout today’s session since Friday will be shortened due to the July 4th weekend.

The ECB kept its benchmark rate unchanged at 1% as analysts expected.  We believe the ECB will keep a neutral stance as far as monetary policy is concerned as the central bank monitors the impact of its purchase of covered bonds.  Investors should also keep in mind the EU opened a roughly $615 billion liquidity window to banks last week in the form of 1 year 1% loans.  The ECB wants to see how these alternative liquidity measures impact the credit markets and availability of funds to struggling EU exporters and manufacturers.  However, the ECB has been prone to surprise the market in the past in order to induce a monetary shock, so investors shouldn’t be complacent and expect the ECB to stay quiet for too long.

Despite the pullback in the EUR/USD, bulls should be encouraged that volume hasn’t spiked to an abnormal level.  Furthermore, the EUR/USD is finding support in our 2nd tier uptrend line and the psychological 1.40 level.  As a result, it seems the EUR/USD may carry its trading range into next week.  The trading range could get tighter soon since investors may wait for our 1st tier uptrend and 3rd tier downtrend lines to approach their inflection point before making a key directional decision.  Hence, investors may want to view the 2nd quarter earnings reports and updated guidance from corporate officers over the next couple weeks before committing to either trend.  On the other hand, should either our 1st tier uptrend or 3rd tier downtrend line break, investors could see the formation of a new directional leg.

Present Price: 1.4050

Resistances: 1.4059, 1.4097, 1.4114, 1.4141, 1.4167

Supports: 1.4024, 1.40, 1.3978, 1.3937, 1.3889

Psychological: 1.40

Market Commentary provided by Fast Brokers.

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