EUR/USD Analysis: Is a Correction Coming?

ForexNewsNow | Published on October 13, 2010 at 5:40 pm

Euro dollarNEW YORK (Forex News Now) – In global forex news today, the risk of a correction in EUR/USD – on the move upwards for the past two months – increased with a retreat by the euro above the $1.40 mark.

The euro managed to climb above $1.40 on two different occasions – at 6:00 AM EST and briefly at 3:00 PM EST – but retreated to close up 0.34% at 1.3962.  The mark is still well above yesterday’s close and slightly above the 5-day open.

Today’s performance was by no means bad for the euro, but a lack of the currency’s ability to sustain the momentum and consolidate its gains above the $1.40 mark for the third day in a row shows that the upward movement seen lately in EUR/USD is possibly heading for a correction, and may be overbought.

Still, the current market modus operandi is to sell dollars.

Kathy Lien, director of currency research at New York’s GFT, said “With the FOMC minutes validating the market’s expectations for stimulus in November, investors have jumped back into the market to sell dollars.”

With that being said, the market will likely need to experience additional global forex news to sustain a consolidated push above 1.40.

“For investors to sell the U.S. dollar even further and push EUR/USD above $1.40, we need to see additional negative U.S. dollar development, which is currently absent,” commented Matthew Strauss, the senior currency strategist at Toronto’s RBC Capital Markets.

Resistance level met

For most investors in the market, $1.40 represents a key resistance level.  Activity in the options market seems to indicate that it is more likely that EUR/USD will see the 23.6% and 38.2% retracement of the euro’s monthly gains ($1.3690 and $1.3490, respectively) than a sustained push above $1.40.

Upcoming global forex news has the potential to either halt the current trend, triggering a pullback, or prevent the pullback from occurring by further weakening the dollar.

For example, if the Federal Reserve announces that the quantitative easing program it will put into place is smaller than the assumed $1 trillion package, the market will likely view that as a positive signal for the dollar and a sell signal on the euro.

The U.S. has major forex news pending for this week that could further upset the balance and nudge the dollar either way.  An advance retail sales report for the month of September is due on Friday, as is the University of Michigan’s consumer confidence survey.  The latter in particular is expected to improve from August’s total, which could spell a bit of good news for the dollar.

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