Today, the calendar in the US contains the CPI, especially the core figure is interesting (will the figure continue to decline? maybe below 1%). However, at this stage, we don’t have the impression that this is a big issue for markets. In Europe the calendar is very thin. After the close of the US markets, the Minutes of the previous Fed meeting will be published. Was there any debate on the pace/timing of the exit? If so, this might be slightly dollar supportive. However, we don’t expect too much of it. The key factor for trading on the European markets and for the euro will be the reaction to the German regulatory measures on short-selling. Of course, the first reaction on the European stock markets will most probably be negative. However, from a euro point of view, we wouldn’t be surprised that we are more or less in the final stage of the recent selling wave. Euro shorts are probably at extreme levels. In addition, yesterday’s sell-off occurred in thin market conditions after the close of the European markets. We have a LT EUR/USD negative bias and don’t feel any need to change it. However, in a short term/day-to-day perspective, we have the impression that we are in some kind of exhaustion move. So, in case the euro would get another hit in Europe this morning, we are inclined to take some profit on EUR/USD shorts. Sentiment has turned extremely negative on the euro, but if the ‘last seller’ has sold its position there is room for some consolidation, or even a short squeeze. So, shortterm we turn a bit more cautious on holding EUR/USD short exposure after the recent violent moves.
Technical picture. Early last week, the ‘big shot’ of the EU policy makers brought hardly any relief for the euro. Very soon it became obvious that the plan was not the ‘final’ solution to stop the bleeding. So, EUR/USD resumed its downtrend clearing several support levels. Early this week, the pair dropped below the key 1.2330 level (2008 low). So, our MT target has been met. In normal circumstances, reaching such a high profile level would be a ‘reflection point’ to reconsider positions, especially as the market has become extremely positioned short euro. However, no forceful rebound occurred. The situation is still precarious and we don’t feel any need to blow against the wind. The long-term fundamentals are not in favour of the euro. Even more, it becomes ever more obvious that several ‘South’ European countries desperately need a weaker currency to restore competitiveness. On top of that, a lot of the credibility issues that have been raised recently on European fiscal and monetary policy are not yet solved. So, we hold on to our long-term EUR/USD negative bias. The 1.1640 (2005 low) is the next high profile target on the EUR/USD charts. The break below the 1.2330 neckline put a massive LT double top formation in place. The first target of this formation is seen at 0.9517! This is not some kind of forecast, but another illustration that were are at an important crossroads, also in EUR/USD trading. While we are EUR/USD negative longer term, in a day-to-day perspective we tend to become a bit more cautious on holding EUR/USD short exposure. The pair is heavily oversold. Partial profit taking (e.g. in case of a drop to toward the 1.20 mark) can be considered. Return action back above 1.2530 (previous low area) would be an indication that the pressure is abating.
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