Tight Euro Range Indicates Impending Volatility

The Euro made a successful test of last week’s low at 1.3584 and finished close to the middle of this week’s range.

The Euro made a successful test of last week’s low at 1.3584 and finished close to the middle of this week’s range. Early in the session, the EUR USD broke sharply but buyers came in to defend the low. Volatility is expected to continue to be high as traders are reacting to news or the lack of news regarding the possible announcement by the European Union of a plan to support the Greek economy.

The daily chart pattern suggests this market is being wound tightly. The longer it remains in a tight range the stronger the breakout move. A rally through this week’s high at 1.3838 should put this market on path to retrace to at least 1.4079 over the near-term.

Timing the swings of the market has been difficult this week as news has been sporadic. One thing that has been made clear is an agreement between the EU and Greece has been reached. The main issue driving the Dollar and the Euro today is the details of the pact. Some bullish Euro traders apparently were led to believe that a bailout out would take place, but that does not appear to be the case.

Talk is circulating that the pact is a show of solidarity by the European Union. This is likely to mean that the EU as well as the International Monetary Fund will maintain a watch over the Greek budget and assure adherence to its strict requirements. Furthermore, loans will be provided when deemed necessary to shore up the Greek economy.

Skeptics maintain that this type of agreement will not last and that similar issues are likely to flare up in Portugal and Spain. These issues will once again test the foundation of the European Union. If anything, trader reaction has been less than bullish although the door has been left open for a substantial short-covering rally in the EUR USD.

The British Pound tested this week’s low at 1.5534 before mounting a strong recovery rally. This market appears to be forming a support base and like the Euro is awaiting details of the Greece rescue plan. Shorts are likely to cover as the details of the rescue are released.

Technically, this market has a short-term upside target of 1.5801 to 1.5865. Gains could be limited because of the economic issues in the U.K. On Wednesday, the Bank of England lowered its inflation estimate while hinting at expanding and extending its quantitative easing program. Furthermore, just because Greece is being helped out does not mean the deficit issues facing the U.K. will go away. Over the short-run, the focus may shift away from Greece to the U.K. credit rating.

The USD JPY finished the day slightly lower during an almost lifeless trading session. Thursday’s weakness comes as a surprise because the combination of the Greek rescue plan and Bernanke’s talk of raising the discount rate earlier in the week should have been supportive for the Dollar. In addition, increased appetite for risk should have triggered a more bullish response. Short-term overbought conditions could be triggering the weakness. The lack of movement in this market could be suggesting that traders remain nervous about the condition of the financial system.

The weaker Euro helped drive up the USD CHF. The high of the day was within a few pips of last week’s high at 1.0794. This was also near an area where the Swiss National Bank finished last week’s intervention action. Because of the magnitude of the situation in Greece, traders may be waiting for the actual release of the details from the EU/Greek pact before committing to the short-side. A recovery rally in the Euro over the past few days should pressure the USD CHF because it eliminates the need for the SNB to intervene to protect the value of its currency and its economy against deflation.

Canadian Dollar traders ignored the stronger Dollar and instead chose to focus on the strength of gold, equities and crude oil. The USD CAD opened lower, but rallied a little early in the session as the Dollar strengthened and risky assets fell.

Technically, this current break in the USD CAD is related to last Friday’s closing price reversal top. The main trend on the daily chart turned down today on the move through 1.0545, but losses were been limited after a successful test of a 50% price at 1.0501. A failure to hold this level will trigger a further decline to 1.0436. The bigger picture suggests more rangebound trading should be expected.

The AUD USD surged to the upside on increased demand for higher yielding assets. Stronger than expected jobs data was the initial trigger of Thursday’s rally. Last night, it was reported that the number of jobs created was almost three times the pre-report estimate. This has once again triggered the debate over an interest rate hike by the Reserve Bank of Australia now that there is evidence the economy may be heating up. The charts indicate this market is on course to reach a major retracement zone at .8953 to .9042.

The NZD USD followed the Australian Dollar higher. Traders are also speculating that a pact between the EU and Greece will calm the markets and increase trader appetite for risk. Last night, the New Zealand Dollar entered a retracement zone at .6978 to .7019. A breakout over .7019 could trigger an acceleration to the upside to .7124 over the near-term.