EUR/USD - Looks Like a Temporary Bounce

By: Andrei Tratseuski

After a tremendous rally to the downside, the EUR/USD is seemingly rebounding as traders lock in their profits. The market sold off abundantly in the previous week as traders weighted the probability of Greek default over the weekend. A lack of a default by the Greece is temporary positive for the EUR/USD, seen by a timid bounce in the currency pair. Moody’s acted in a swift pace as risk of contagion is spreading; rumors have been floating around of a potential downgrade of key French banks. With heavy exposure to the peripheral debt Societe Generale, Credit Agricole, and BNP Paribas are key banks that stand of being downgraded. A downgrade of the largest banks in the Euro-zone may have negative consequences on the EUR/USD as risk aversion will pick up. During times of uncertainty, money flow out of Euro-zone and generally found themselves in the United States, and particularly U.S. Treasuries.

A 10-year U.S. Treasury yield is still hovering below a pivotal 2 percent threshold. In turn, the following yield suggests that there is abundant amount of demand for “risk-free” assets as peripheral problems continue to manifest. As yields of treasuries drop, and consequently the trading price of treasuries are at a premium, the U.S. dollar gains ground. In order to participate in the acquisition of the U.S. treasuries, a foreign investor must first exchange the money into the U.S. dollar, in turn, advancing the price of the currency. By pulling money out of other higher yielding currencies and investing the proceeds into the U.S. dollar, the greenback is gaining abundant amount of ground against other major counterparts.

On technical perspectives the Euro is attempting to rebound against the U.S. dollar as a quick pick-up in risk appetite is helping the risk appetite vehicles. Currently a profound level of resistance is lingering at a 23.6 Fibonacci retracement at 1.3750. The value of a 14-period Relative Strength Index (RSI) is near zero, prompting a rationale that a rebound could occur if the index appreciates above 30. There is a chance that the currency pair can make back into the downward channel formation after a temporary break of support. Current support lingers at a pivotal psychological support of 1.3500, which is also the lowest the currency pair has been in over half a year. Clearly, the bias is currently holding for a temporary rebound, yet any increasing fears of peripheral problems especially coming out of Greece could accelerate the loses. Conversely, a lack of negative news from the peripheral nations could temporary allow 17-nation currency to appreciate.