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I think that we are a little stretched at the moment, so do not be surprised at all to see a short-term bounce.
The euro has continued to drift a bit lower on Tuesday to reach the 1.0850 level. This is an area where we have seen a little bit of support as of late, and if we can break down below there we could likely go looking to reach the 1.08 handle next. That is an area where we expect to see a lot of support, so I am not necessarily looking to short this market until we get a daily close below that area.
In the meantime, I think that a bounce will more than likely be sold into, so am looking for some type of short-term bounce and show signs of exhaustion that I can start selling again. I do think that it is probably only a matter of time before the sellers come back because the market has been in a negative trend for quite some time. Furthermore, the overall fundamental situation does nothing to help the euro, as the Federal Reserve is looking to tighten monetary policy, while the ECB is nowhere near it. Furthermore, interest rate differentials between Germany and the United States continue to favor the greenback as well, so as long as that is the case, I like “buying cheap dollars.”
It is not until we break above the 1.12 level that I would be convinced that perhaps we can start to look to the upside. I think that we are a little stretched at the moment, so do not be surprised at all to see a short-term bounce. That bounce should be an opportunity as far as I can tell, so I will simply wait for an exhaustion candle to get involved in what has been a relatively reliable downtrend. The 50-day EMA is sitting at the 1.1080 level, and it is likely that it will offer a bit of dynamic resistance as well. I will probably sit on the sidelines for the next couple of days, and start shorting this market rather easily on a long wick to the upside. If we do break down below the 1.08 level, I believe that the area down to the 1.05 level is very noisy, so I would not expect to see the market simply fall apart.
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