Equity Market Weakness Could Spillover to Euro

The late session break in the U.S. equity markets may be a sign that trader appetite for risky assets may not be as strong as the Forex markets are indicating.  The chart pattern suggests that the trend is up in the Euro, but nearing resistance at 1.3854.  If equity markets weaken then don’t be surprise by the start of a sharp decline in the Euro.

Investor need for more risky assets continued to support the Euro this afternoon. In addition, the U.S. Dollar extended its losses following the release of the Fed’s FOMC minutes. Traders reacted to the minutes which showed Fed members were considering increasing its purchase of mortgages and government debt. This act would debase the Dollar further and may lead to inflation if done incorrectly. This was the main reason for the late session selling pressure.

The strong surge to the upside took out last week’s high at 1.3722 and negated the developing reversal top. This market is now trading above a major 50% price at 1.3587 and rapidly approaching the Fib retracement level at 1.3854. Regaining the bull side of the Fibonacci price will indicate higher prices to follow. 

Trend traders are having no problems as the market is clearly making higher tops and higher bottoms. In fact the trend will not be threatened unless 1.3422 is violated.

Remember that this market is being driven by speculation that an economic recovery is just beginning. The European Central Bank has been warning that a recovery will be slow but traders still feel the need to take on the extra risk at this time. The best warning signal that a short-term top is forming will be a closing price reversal top on either an hourly or daily chart.