Will Stress Test Worries Weaken Euro?

The Euro traded in a tight range on Monday despite overnightnews which should’ve added a little volatility to the market. Today’slackluster performance may have been caused by low volume as many traders mayhave chosen to stand on the sidelines until Friday when the European bankstress test results are scheduled to be released.

The Euro traded in a tight range on Monday despite overnightnews which should’ve added a little volatility to the market. Today’slackluster performance may have been caused by low volume as many traders mayhave chosen to stand on the sidelines until Friday when the European bankstress test results are scheduled to be released.

Throughout July, Euro traders have expressed concerns thatthe stress tests will not be transparent enough to yield any significant data.Some traders feel that the test specifications were not rigid enough to revealanything of value. Throughout the process there was a rumor circulating that atleast eleven banks may have failed the test. The market hardly reacted to thisnews. European Central Bank President Jean Claude Trichet did mention two weeksago that some banks will have to raise capital, this statement also failed tostop the Euro rally.

Based on today’s action, it looks as if investors are morelikely to keep the Euro in a range rather than take a side in the market. Thecurrent rally may remain intact also as some traders are beginning to believethat the Euro Zone may outpace the U.S. during the second half of theyear. At present it seems the Fed is going to have to keep interest rates lowuntil the end of the year and may also be considering new stimulus programs. Inthe meantime, the ECB appears to have stabilized the European sovereign debtproblems while calling for a fastest recovery than previously estimated.

Early in the trading session the Euro looked strong, havingwaved off the overnight bearishness created by a downgrade of Irish debt andcommunication problems between the International Monetary Fund and Hungary. Adecline in the U.S. National Homebuilders Association Confidence Index alsotriggered a rally, but traders were unable to take out Friday’s high at 1.3006,prompting a profit-taking break. Throughout the day the Euro was wavering butremained positive.

Technically, Friday’s closing price reversal top was confirmedovernight, but there was very little follow-through to the downside. This typeof formation usually triggers a 2 to 3 day break of as much as 50% of the lastmajor swing up. Traders should watch for late session weakness to reaffirm thereversal top. A trade through 1.3006 will negate the formation.

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

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