Euro ReverseEuro Reverses Up after Testing 1.2164 Retracement Level

The Euro is rallying this morning after testingthe 50% level at 1.2164 overnight. The actual low of the break from Monday’shigh was 1.2167.

The Euro is rallying this morning after testing the 50%level at 1.2164 overnight. The actual low of the break from Monday’s high was1.2167. The ability to recover after early session weakness is a sign thatinvestors are shrugging off yesterday’s news that Moody’s downgraded Greece’s debt.The strong turnaround has put the market in a position to take out yesterday’shigh at 1.2297. The main trend on the daily chart will remain down, however,until the May 28th top at 1.2453 is violated.

The Euro surged early in the session on Monday as upbeatfeelings about the global recovery helped drive up demand for higher riskassets. Yesterday’s strong rally was a continuation of last week’s bottomingaction which was triggered by positive comments from Fed Chairman Ben Bernankeand European Central Bank President Jean Claude Trichet.

Bernanke told the Senate last week that he believed that Europe has the money to protect its currency fromcollapse. The market rallied on his comment because it meant that Europe would use all means to prevent sovereign debtissues from escalating. Trichet said the ECB would not increase stimulus in theeconomy. This meant the economy was strong enough to not require any additionalaid from the central bank. Both comments were supportive to the Euro.

Late Monday, the Euro broke from its high but still managedto hold on to most of its gains. News of a downgrade of Greece debt byMoody’s made weak longs nervous, triggering a profit-taking break. Many tradersfeel that the break was unnecessary because the move by Moody’s was based onold news. Investors also feel move optimistic about the Greece’s futurefinances.

Last week’s closing price reversal bottom at 1.1876 wasconfirmed on Monday. Based on this pattern, watch for the start of a 2 to 3week retracement with 1.2784 the next potential upside target.

In summary, the weekly chart is set up for a strongretracement rally to 1.2784, provided the Euro holds a test of a minorretracement level at 1.2087 over the next few days.

The main trend in the GBP USD turned up on Monday when themarket crossed the last swing top at 1.4769. There was very littlefollow-through to the upside, however, because the Sterling ran into a 50% retracement level at1.4810. The British Pound is under some light pressure this morning after itwas reported that U.K.inflation slowed in May for the first time in three months.

Technically, the main trend is up, but the rally could stallunless upside momentum can overcome resistance at 1.4810. Regaining this priceand building support can trigger another rally to the .618 retracement level at1.4947.

The USD JPY is under pressure this morning despite greaterdemand for higher risk assets, lead by a rally in U.S. equities. Investors aresupporting the Japanese Yen after the Bank of Japan said Tuesday it would offerfinancial institutions up to 3 trillion yen in new lending. “Through thismeasure, the bank expects that the efforts of firms and financial institutionsto support Japan’seconomic growth will be further stimulated,” the BoJ said in a statement. Tradersseem to like the news and are buying the Japanese Yen as a sign of support forthe BoJ’s decision.

Technically, the break back under the 50% level at 91.61 isa sign of weakness for the Dollar/Yen. The daily chart indicates that a moveunder 90.83 could trigger an acceleration to the downside.