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February 3rd, 2013 at 8:18 am

ECB Could Kill the Euro Rally.

One of the biggest stories in the world of currencies so far this year has been the Euro. While the Japanese Yen is capturing most of the headlines, due to its impressive collapse, the common currency is a close second. In this case, however, it is the strength of the Euro, which is receiving attention of the markets. It is safe to say that its rally is even raising some eyebrows, as well as voices of discontent in Europe. After all, economic data from the continent does not support this rally, which reached 1.3710 versus the Dollar on Friday. The Unemployment Rate alone, at all time high in the Euro zone, should have been enough to put breaks on this appreciation and cuase ripples through the entire Forex market. Perhaps the European Central Bank will do just that during its policy meeting later in the week.

With its benchmark at 0.75%, the ECB rate policy is the most “generous” among the key central banks. Analysts had been predicting a rate cut for a few months but to no avail. The situation has changed and by now, only about 15% of market observers expect to see action from the central bank. This could be an excellent time for the ECB to implement more easing, surprising the markets and quite possibly end the Euro rally. A lot depends on how threatening the strength in the EUR is to the general recovery in the Euro zone, or rather ECB’s view on the subject. Politicians from several countries have already declared the Euro as too strong, putting pressure on the bank.

We can already see signs of potential weakness ahead in the Euro pairs. The EUR-CAD, for example, has developed a strong shooting star candlestick pattern on the daily chart. It is technically valid, emerging after a solid rally and on a day of with significant price range. It might signal a pullback to the 1.32 handle, or the level of the latest bullish breakout. I do not intend to trade this development, but will watch all support levels on smaller time frames, like the 1H chart trying to catch bearish moves there. If they happen, this pair cross could provide couple of quick trades to the downside with opportunities in the range of 50-80 pips each.

As for immediate trading, I will look for opportunities in opening gaps, if they happen. Another strong candidate for a trade is the GBP-USD using the daily chart. This pair fell freely on Friday, almost touching its key support at 1.5675. More interestingly, it also closed on Friday near the extreme for the day. In this general area, the cable is susceptible to a short-term rebound. I would like to see the price to move lower after the opening, preferably test the main support. A signal to buy would be a bullish candlestick pattern on this chart, with objective of 40-50 pips. Details will have to be worked out once the set up emerges. Have a great trading week!

Mike K.

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