The EUR/USD pair initially fell during the course of the day on Monday, but found quite a bit of support below to turn things around and form a hammer. The hammer of course is a very bullish sign, and therefore we feel that the pair is going to try to reach towards the previous uptrend line that, so much resistance again. If we get that move, we could very well try to reach towards the 1.10 level. Above there, we feel that the market will have changed trends, but on the other hand if we break down below the bottom of the hammer, that would be an extraordinarily negative sign.
Keep in mind that the European Central Bank shot the market weeks ago when it suggested that more stimulus could be the way going forward, and that of course works against the value of the Euro in general. That started a bit of a move lower in an already negative market. However, the ECB did not come through with much in the way of stimulus, and that of course have the market trying to correct what would have essentially been an oversold condition.
Nonetheless, the one thing that we cannot get around is the fact that the ECB very well could add stimulus, but we also recognize that on the other side of the Atlantic we have the Federal Reserve which is almost guaranteed to raise interest rates. What is going to truly make a difference in the longer term is whether or not it looks as if the Americans have to do that more than once. At this point though, we have to recognize that the market certainly looks well supported at current levels, so we will have to have some type of significant battle somewhere near the previous uptrend line. A move above the 1.10 level more than likely would send this market looking for the 1.14 level next. On the other hand, a break down below the bottom of the hammer should send this market looking for the 1.06 level again, where we had seen so much in the way of support. Regardless, the one thing that you can count on will be volatility.