The euro initially fell on Friday but turned around to recover again and reach towards 1.1350 level. This is an area that will come into the picture noisily, as we have continued to rally and form a bit of an ascending triangle, but it is sitting just below a major trendline that had been part of the descending channel. If we can break above the 1.14 level, then we may pick up a little bit of momentum, but until then I look at this as essentially the market going nowhere.
If we can break down below the bottom of the candlestick for the trading session on Friday, then it will continue the overall downtrend, which I think at this point will more than likely be decided by the yield differential between Germany and the United States, and whether or not it is widening or contracting. It is interesting that people bought the 10-year note during the trading session on Friday, driving yields down and making the euro a little bit more attractive.
The market is a little oversold at this point, but you can also make an argument for a bearish pennant. Heading towards the end of the year we will have to keep the liquidity issue in the back of our head, so we will need to be very cautious about expecting too much out of the market. However, if we get some type of sudden shock to the system, we could see a massive move based upon the fact that nobody will be in the market. The 50-day EMA is still sloping lower and hanging about the 1.1446 level, so that in and of itself could continue to put a little bit of negativity into the market.
To the downside, the 1.12 level is supportive, and breaking down below that would open up a move down to the 1.10 level. If we do in fact break down from here, based upon the “measured move” of the bearish pennant, we could be looking at 1.09, but that is not my base case scenario between now and New Year’s Day, which typically is a very choppy and somewhat indecisive time of year. Quite frankly, this pair can be that way during the middle of the year, so I do not see why is going to be different during the holidays.
