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Consolidation before the Fed but Positioning Shows Markets Bearish on EUR

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The euro bounced off of its lows for the day despite S&P downgrading the credit rating of Italy. Today's price action may be seen as a consolidation with markets awaiting results from the Fed's meeting. Market players may be looking for further EUR declines as speculators have built their largest position against the EUR since early August.

The majors have been unable to find direction today as many participants are eyeing tomorrow's FOMC statement. Expectations are for some form of "Operation Twist" with the likeliest path being the Fed purchasing US Treasuries at the long end of the curve using the proceeds from the maturing MBS the Fed holds on its balance sheet. This could be a positive for the USD if the Fed goes this route versus an expansion of the Fed's balance sheet. This stands in contrast to the ECB, BOJ and BOE who are likely to increase their balance sheets in the near term.

The EUR was sold during the Asian trading session after S&P announced it was downgrading the s overeign debt rating of Italy , effectively beating Moody's to the punch. But the selling pressure was not enough to send the EUR/USD below yesterday's low which was made at the opening of the North American session. The pair found resistance at last Friday's low of 1.3750, essentially closing the opening gap from the weekend though a close above this level on the daily chart would be needed to test the next resistance of 1.3930. The euro zone debt saga continues to drag on with the Troika talks ongoing. Things may get better before they get worse with rumors flying of a Greek exit from the EMU . The downside beckons at 1.3500 though move lower and a failure to break last week's support would set up a double bottom, a bullish technical pattern.

According to the latest CFTC Commitment of Traders report speculators seem well positioned to test the 1.3500 level as EUR shorts have grown to their largest positioning since early August. Any consolidation could hurt weak USD longs but rising open interest suggests speculators favor further moves lower in the EUR/USD.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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