EUR/USD Hovering Around 1.4200 - Direction Unsure

Monday, 25 October 2010

We spoke at length about the EUR/USD last week, and the apparent formation of a Shooting Star candlestick formation which occurred towards the end of the week. Having reviewed that pattern at the beginning of this week, it seems that the bullish signal has not yet eventuated.

In fact, nothing has eventuated. The currency pair seems to be stuck in much of a stalemate - with the directionless currency pair proving to be a bit of an anomaly in the currency markets over the last 7 days.

Overall, the USD gained ground last week - especially against currencies such as the AUD and the NZD. This was on the back of the doubts which were fresh in investors' minds regarding the possibility of intervention in the currency markets - especially in terms of quantitative easing measures from the US.

It would appear that investors have had a change of heart, and no longer believe that the probability of intervention on this scale is likely. Why? Probably because of the comments which came out of the Fed meeting at the end of last week. The comments from a number of central bank heads were oriented towards the idea that more intervention is unlikely - given the long term risk of inflation which is currency present.

Long term inflation (something which any central bank would want to avoid) - has been touted as the unwanted by product of quantitative easing measures over the last few years, and therefore if the Fed was to encourage even more quantitative easing in the near term - it would be doing so at the expense of inflation in the long run.

It has therefore been told by a number of government officials that it should ignore the factors of trying to "please the market" - and instead just focus on the long term prospects of the economy, and therefore the long term objective of keeping inflation under control.

Given this information, what is our opinion on the technical's relating to the EUR/USD? Ultimately, we believe that the EUR/USD is set to fall this week - and we think that once it breaks away from the 1.4200 level - it will accelerate downwards.

The RSI on the daily chart is confirming this view. We believe that the currency pair will continue to hover over the next few days, and then progress downwards to close down on the week. If this doesn't happen - it will probably be because of further comments out of the Fed indicating that the probability of quantitative easing is back on the cards.