Currency Contest

Euro Smashes Through Critical Short-Term Resistance; 1.4000 Exposed

Joel Kruger, Currency Strategist, Research Desk, DailyFX

Markets are off to the races on Wednesday and the consolidation seen over the past few sessions has now been broken. This is certainly a welcome development for risk correlated assets, which have been benefiting from a renewed sense of confidence. Much of the confidence revolves around development s out of the Eurozone where it seems as though officials have stepped up and are now on the verge of implementing an effective plan which will appropriately respond to distress in the eurozone economy.

Technically, the broad based price action is significant in the short-term as it opens the door for a more substantial decline in the buck over the coming days. The break in the Euro back above 1.3700 now opens a retest of the 1.4000 area, while Cable has triggered a double bottom which exposes 1.6100 further up. Meanwhile, the commodity bloc currencies are well bid, with Aussie eyeing 1.0200, Kiwi charging towards 0.8000 and Usd/Cad dropping back towards parity.

Still, we would take all of this with a grain of salt and expect any additional currency buying to be very well capped into the next levels of resistance mentioned above. We continue to defer to the longer-term charts for clarity, and with the Euro looking like it is rounding out a major lower top below the record highs from 2008, additional weakness in the currency towards 1.2000 is forecast over the coming months. As such, our recommendation and strategy is to look to be a seller of currencies and buyer of USDs once the Euro breaks back above 1.4000. Any additional gains above this psychological barrier should be well capped ahead of a resumption of the broader currency downtrend.