EUR/USD - Hint Of Bearish Bias But Don't Bet On It

by Mingze Wu

EUR/USD rallied suddenly last Friday during European hours, only to see a sharp pullback during the U.S. trading session to end just under 1.375 - the levels when EUR/USD were just before the bullish breakout (see hourly chart below). As prices managed to hit close to 1.39 at the highest, this bullish breakout and the subsequent pullback accounted for a total of close to 300 pips within 12 hours, and this number increases to close to 350 pips if we take into consideration that prices were actually just under 1.37 during early Asian hours.

This strong volatility is a textbook example of why trading during low volume holiday season is risky - prices may have a tendency to explode in either direction on weak news / announcements as the low volume means that we do not have enough traders on the other side should a bias in the market be formed. Hence, a bullish announcement that would normally have produced a 50 pips push may result in more than 100 pip as the ratio of bulls versus bears get extremely distorted. As this is an overreaction, it will not be surprising to see bears coming back into play and sending price back lower again, resulting in last Friday's price behaviour.

So what is this announcement that sent EUR/USD up so aggressively to begin with?

It turns out it's simply ECB's Jens Weidmann reportedly saying that current weak inflation does not give the Central Bank "license for arbitrary monetary easing" in his interview with German newspaper Blid. This is actually as non-news as it can get, as the President of Bundesbank has been very vocal against ECB's easing programs, at one point even threatening to resign if ECB ever issues bonds themselves. It is no surprise that Weidmann would say this, and in fact his tone has actually softened considerably from before, agreeing that eurozone's low interest rate is justified (implying that he agrees ECB should have slashed rates to 0.25%, and may even mean that he is open for further rate cuts in the future). Therefore, the market's bullish reaction to this is akin to being surprise that water is wet, and the push towards 1.39 is utterly unreasonable - yet another hallmark of low volume holiday trade where a small group of irrational kneejerk traders can cause a strong cascading effect.

Daily Chart

(click to enlarge)

Nonetheless, last Friday's reaction does give us an indication of market's sentiment. Looking at the Daily Chart, we can see that price end up closing below the rising trendline that has been in play since early November, which is also the confluence to the soft support of the consolidation zone seen in mid Dec which has now became resistance. This morning's slight bearish push corroborates the bearish sentiment, suggesting that we may have a bearish confirmation of the trendline rejection which opens up a move towards 1.36. Stochastic readings are pointing higher, but with Stoch "resistance" seen between 40.0 - 50.0, it will not be surprising if Stoch curve reverses from here.

It is also interesting to see that bulls did not manage to push prices higher this morning even though ECB President Draghi was interviewed by German news Spiegel, in which he said that there is no urgent need to slash the main policy rate lower. One would have thought that Draghi's words should be even more impactful than Weidmann, whose opposition to ECB's policy has been dismissed by the former who once dryly said that the German only has one vote for all the strong displeasure he may have. Hence, the lack of bullish response this morning is yet another indication that EUR/USD may be inherently bearish right now, echoing what the technicals are showing us.

Hourly Chart

(click to enlarge)

The short-term chart suggests that a temporary bullish pullback may be possible as momentum is already heavily "Oversold". However, overall bearish bias remains intact below the rising trendline (from daily chart) and we could see a bearish acceleration once again should the soft-support just above 1.373 is broken.

Then again, remember that this is low-volume season we are talking about. The market may react crazily this week once again for no reason at all, rendering all the above analysis useless. A more conservative approach may be to wait until next week and see if all the technical set-up still applies when normal trading resumes.

Source: EUR/USD - Hint Of Bearish Bias But Don't Bet On It

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