Euro Pressured Early but Settles into Range on Slow News Day

Lower Asian and European equity markets overnight triggereda break in the Euro early in the session, but stable U.S.stock markets helped to hold it in a range most of the New York session.

Lower Asian and European equity markets overnight triggereda break in the Euro early in the session, but stable U.S.stock markets helped to hold it in a range most of the New York session.

Without any major economic reports to push the marketsaround, traders have decided to focus on two elements: the start of U.S. earningsseason and the European bank stress results.

U.S.earnings season begins after the equity market close this afternoon. Since theEuro has been taking its cue from equity markets lately, traders expect today’sfirst report from Alcoa to move the market.

European stress test results are not due until July 23rd,but that hasn’t stopped traders from expressing concerns about the event.Traders continue to question the toughness and transparency of the report.There is also confusion as to how much information will be revealed and if thepublication of the results will be limited to only large banks.

The question of ordering banks to recapitalize came up latelast week when European Central Bank President Trichet mentioned in a speechthat it may be necessary.

Technically, the EUR USD confirmed last week’s daily closingprice reversal top at 1.2722. This pattern usually suggests a 2 to 3 day breakcoupled with a 50% to 61.8% correction. This would make 1.2436 to 1.2369 thenext likely downside target.

Besides the cautious approach by investors ahead of theAlcoa earnings report after the close, U.S. markets reacted to the sell-offin the Japanese stock market. Japanese equities broke after the nation’s rulingparty lost more seats than expected in Sunday’s upper-house elections.

This new round of political uncertainty could mean moreeconomic woes for the country. Traders are worried that a drop in equity pricescould increase the chance of a double-dip recession. In addition, someinvestors feel the economy will be threatened by the possibility of deflationonce government stimulus fades and if global demand declines.

The USD JPY was under pressure most of the night as tradersinterpreted the news as bearish for the currency. Early last week theDollar/Yen posted a daily closing price reversal bottom. This bottom wasconfirmed by a subsequent three-day rally. Although the chart indicates thereis room to the upside with 90.97 a potential upside target, traders should beaware of a possible short-term correction back to 88.06 before moving higher.

Friday’s closing price reversal top on the daily chart inthe Euro was also confirmed overnight. The current chart formation suggests apossible 2 to 3 day break back to 1.2436 to 1.2369 over the near-term.

Over the next two weeks earnings reports should be the keymarket driver until the European stress tests are released. This means the Eurois likely to take direction from the U.S. equity markets. Robustearnings should drive stock prices higher and along with that, appetite forhigher yielding assets. Commodity-linked currencies should also see greaterdemand if U.S.stocks can breakout to the upside. Conversely, worse than expected earningsresults should trigger an equity market break taking the Euro and higheryielding currencies with it. Lower demand for risky assets could be beneficialfor the Yen despite the recent political change.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More