Euro Approaching Retracement Zone; Major Decisions have to be Made

With the Euro rapidly approachingthe major retracement zone at 1.3577 to 1.3744, traders have to be askingthemselves if overcoming this area means investors are betting on a rate hikeby the European Central Bank or do they believe that Europeis overcoming its fiscal problems.

With the Euro rapidly approachingthe major retracement zone at 1.3577 to 1.3744, traders have to be askingthemselves if overcoming this area means investors are betting on a rate hikeby the European Central Bank or do they believe that Europeis overcoming its fiscal problems.

The aforementioned retracement zonewas created by the November 4 top at 1.4282 and the January 10 bottom at1.2873.

At this time when the Euro wastopping, there were concerns over Ireland’s austerity budget. Inaddition, the widening in peripheral Euro Zone bonds spreads sent investorsinto the U.S. Dollar.

It was also reported in earlyNovember by Reuters that “The premium investors demand to hold 10-year Irishgovernment bonds rather than German benchmarks rose to a Euro lifetime highafter Dublinproposed a budget some traders said was ‘unrealistic’”.

Investors were pressuring the Euroas real-money accounts started to take a negative view on the Euro Zoneperiphery and the potential impact that any restructure would have on Europeanbanks. The fiscal situation was getting so bad that ECB Executive Board memberLorenzo Bini Smaghi said the issue of a country being in a position where itcannot repay debt could not be excluded.

Debt issues and concerns about theEuro Zone’s structural problems drove this single currency down sharply over atwo month period before bottoming

As the market approached its bottomon January 10, the key news stories at the time dealt with Portuguese, Italianand Spanish debt issues. There was also speculation that Asiawould absorb most of the European debt.

Finally on January 13, the ECB said,“The current key ECB interest rates still remain appropriate”. ECB PresidentTrichet was quoted as saying, “Risks to the medium-term outlook for pricedevelopments are still broadly balanced but could move to the upside”.

The conclusion that has been reachedis that the market’s reception of the troubled nations’ debt may have helped putin the bottom and speculation that the ECB may raise rates before the Fedhelped accelerate the rally.

So as the market approaches the key50%/Fibonacci retracement zone, what is clear is speculators have pared theirshort Euro positions. Now they will have to decide if the European fiscalproblems have subsided enough to return their focus to Euro Zone growth. Onesign of conviction by traders that Europe hasturned the corner will be the regaining of this retracement zone and theestablishment of enough support to give the Euro the power to challenge theNovember top at 1.4282.

If the rally stalls or stops in theretracement zone, then this will be a sign that the bears are still in controland they believe that the European debt problems will resurface. In addition,it will also mean that they believe inflation will subside and the ECB willkeep rates low for a prolonged period of time.

Forfurther information on this and other Pattern, Price & Time products visitour website at www.patternpricetime.com

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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