FX Technicals: Where's the Next Move?

Finally, the EUR/USD has broken out of its 1.30-1.33 range to the downside, as expected. The deterioration of sentiment in Europe is finally occurring, as the market wises up to the fact that the LTRO's did nothing other than buy time for the banking system. Remember, financial crises go through three stages: 1) transitory, where the problems are addressed and promises are made to fix them (2010), 2) crisis, where markets fear that the worst is coming, as promises are left broken and more promises to mend the problem are made (2011), and 3) panic, when markets seize up, liquidity disappears, and we face the breakdown of financial markets as we know it. This was the pattern that the bursting of the US housing bubble followed, and this should not be different.

There are lots of risks to this pair over the next few days. Tomorrow, there is a 3-month and 6-month Spanish bill auction. Any weakness in the results of this auction will turn sentiment sharply lower. On Wednesday, there is a German 2-year auction, which will be watched closely. Any perceived weakness in Germany will signal that investors are losing hope that Merkel can save the world. Later that night, the HSBC China PMI will definitely be a market moving event. Any weakness in China will be viewed as a spill-over effect from Europe, which will weigh on the euro. On Thursday, Eurozone PMI's are released, and these are the "main event," as we will get a rather current view of the economic situation of all of the individual countries, as well as the Eurozone as a whole. ECB President Draghi also speaks at 9 am, and the market will be looking for any hints of further policy actions; inactivity will drive the pair sharply lower, whereas as new policies may cause a spike that should be shorted. On Friday, it all quiets down.

Good luck and good trading.