NEW YORK (Forex News Now) – With the recent weeks of positive news for EUR/USD, one would suspect that the upward trend should continue with plenty of support coming from ongoing weakness with the dollar.
Today’s drop for the euro, though, mixed with a bit of technical analysis, could prove otherwise.
In trading today, the euro fell 1.51% against the dollar to 1.3734, well below the previous high above the 1.400 mark reached last week. While the euro is still well above the 2010 low of $1.18 reached in June, there are warning signs for a possible reversal.
Roelof van den Akker, a forex analyst at ING Wholesale Banking, provided insight with EUR/USD analysis by stating, “Last week prices broke above $1.40 and a half, but failed to continue this sharp up move, so we see the first signs of a somewhat toppish outlook.”
The key level for van den Akker and other analysts appears to be $1.3670. Closing below that level could signal a possible drop for the euro potentially as low as the $1.33 level – which would be the first time EUR/USD has reached that mark since the middle of September.
Closing above that level today, though, could indicate that the rally witnessed today with the dollar will be short-lived.
Chinese rate hike
Of course, most analysts saw this downturn today coming. John Doyle, a forex strategist with Tempus Consulting, said, “The dollar is finding some support here after China’s rate hike triggered a bout of risk aversion, but the euro above $1.40 was overbought, so the rebound is no real surprise.”
The rate move referred to by Doyle occurred earlier today, as China shocked the market with an unforeseen rate increase – a move assumed to be in response to rising inflation, not criticism of China’s policies regarding its ongoing exchange rate for the yuan.
The dollar responded well to the rate increase by the Chinese central bank, and also from assumptions that any ramifications from the pending stimulus action from the Federal Reserve has already been priced in.
If this is the case, then EUR/USD analysis predicts EUR/USD will slow its upward trend, if not reverse it altogether. It is not out of the realm of possibility to see a retreat in the euro back below the $1.35 mark, closer to the $1.33 mark as predicted by van den Akker and others.
Then again, few are predicting that the dollar will manage long-term gains against the euro until systemic weaknesses are corrected – which will not happen soon.