The EUR/USD pair gapped down massively on the open Monday. The elections in Europe shocked the markets as the voters in three countries went decidedly anti-austerity. In fact, Greek even went so far as to elect neo-Nazis to parliament. This group is merely a symptom of a country that cannot take any further austerity as the economy in Greece is simply in trouble.
The French election of Mr. Hollande wasn’t much of a surprise, so this would have been effectively priced into the markets by our estimation. The loss of much of Merkel’s party in German local elections could spell real trouble down the road in that country as well. At this point in time, a lot of people have to be asking exactly how this mess in Europe is going to end. There is even open talk of the IMF not bothering to give the Greeks their money for the next bailout if they take a different path.
All of this leads to one very important fact: The European Union is full of uncertainty at the moment, and the markets absolutely hate uncertainty. Because of this, there shouldn’t be much surprise in the reaction we saw at the open of trading this week.
The market rose enough to fill the gap by the end of the day, and now the real question is whether or not the gap will hold as resistance. If you look around at the various currency pairs, it looks like it should as many of the “risky” pairs filled gaps, and then drifted lower towards the US dollar. (The Pound being a massive outlier at this point.)
The pair even managed to run stops down at the 1.30 level in the early hours. This area hasn’t been able to be overcome this year yet, and the bounce made sure the day ended above the level yet again. It is because of this that we think this pair will eventually fall, but there is going to be a lot of noise below the current level. The descending triangle that we have been pointing out has been broken to the downside, but now we need to see if this is a “false breakout”. A daily close below the 1.30 level still needs to be seen for us to be completely comfortable selling this pair, as the market simply seems to float above at this level.
The are many rumors as to why the 1.30 level can’t be overcome, with Asian central banks protecting their diversified holdings as the most common one. As the world central banks moved away from the US dollar and into other currencies to protect profits and sovereign wealth, they bought a lot of Euros – right before all of this started. Central Banks have horrible timing for these things, and this is why it makes even more sense that this level gives way. Again, we are selling a daily close sub-1.30 as it would show a real breakdown in this pair.
Written by FX Empire