The EUR/USD fell during the session on Thursday after the Italian 10 year bond auctions came out with a lackluster performance. The yield was just under 7%, but the after auction trading in the secondary markets saw the bonds fetch more than 7% – a level the markets think are unsustainable. Because of this, the EUR/USD fell as traders ran to safety.
The later hours of the session saw the Euro hold above the 1.29 level, and as a result the pair got a nice bounce as there simply wasn’t enough firepower in the markets to take the pair lower. The low volume probably both exaggerated the downward move and the recovery as most professional traders are simply out of the markets right now. With this in mind, we have to take the price action with a grain of salt right now.
The sovereign debt issues continue around the European Union, and there is a massive amount of funding needed in the first quarter of 2012. With this in mind, we are very bearish of the Euro going forward, but the daily bounce did produce a perfect hammer after the fall on Wednesday. Because of this, it looks likely that the pair will continue to rise in a “dead cat bounce” of sorts. In fact, the top of the Thursday range getting broken to the upside would be a buy signal. However, we think this would only be a short-term scalp at best.
We prefer to sell this pair as it bounces as the trend is certainly to the downside currently. The breaking of the bottom of the Thursday range would be massively bearish as we continue to push lower, which is more than likely coming, but in January – not on Friday. The rallies have all simply been selling opportunities, and unless the European Union suddenly comes up with the “magic bullet”, there is a low likelihood that this pair will raise over time. In fact, we are selling all rallies on weakness, a break of the Thursday lows, a daily close below 1.29, and would only buy if we managed a daily close above 1.35 as it would show a serious change in sentiment.
Written by FX Empire