How far does this EUR rally go?

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It’s day one of the “new world” according to the FED and it seems that financial markets are responding positively to the announcements made yesterday by FED Chairman Ben Bernanke. The DOW rallied as did the S&P 500, gold moved higher, and the EUR is trading above 1.3000.  GBP has seen the 1.6200 level and currently (4:30 am) is trading just below that level.  AUD and CAD are trading higher as well.

So, now that the long awaited announcement of QE3 has come, where do we go from here? Has open-ended easing by the FED finally given traders the confidence to go “all-in” on the risk currencies?  With the latest easing program now in place, traders seem to buy buying currencies with confidence that this program will not end until the unemployment rate falls to 7%.

Guest post by Matthew Lifson, Foreign Exchange Trader, Market Analyst of Cambridge Mercantile Group.

As the EUR has rolled through the 1.3000 level, stops were tripped and the currency reached overnight highs above 1.3050, before easing back to current levels.  It seems for the time being that any sellers are waiting for the latest “buying spree” to run its course before getting back into the market.  Technically, we are in some interesting area at these levels.  A break of the 1.3060 resistance level could see traders target the 1.3150 level.  This would be the 38.2% level on the Fibonacci scale of the 1.4940 to 1.2040 move.  So how far does this EUR rally go?  Will these gains be short-lived or can the EUR sustain these moves?

The last two easings have seen the currencies rally against the dollar but these moves haven’t lasted.  While the FED adds liquidity to hopefully improve the economy and reduce the level of unemployment, the problems that existed in the Eurozone still exist.  Has yesterday’s news made it easier for Greece to meet the requirements on the Troika for further aid.  Did the FED easing eliminate the need for Spain’s need for a full-blown bailout program?  EU Finance ministers are meeting today in Cyprus and these are two of the items on the agenda. According to reports, there has been pressure exerted on Spain to request bailout assistance. But Spain’s Rajoy apparently is looking to wait a little longer before taking this step.  So how has yesterdays actions helped here?

After the last two easings, the markets sold off the USD at first, but then finally turned and slowly moved back into USD long positions.  One could take the stance that the US is actually taking steps to improve the economy.  So, you have a choice.  ECB unlimited buying plan to help lower yields or FED Quantitative Easing to add liquidity and eventually reduce unemployment.

The answer to this question is an easy one.  Sooner or later, traders need to pick an economy to back.  The latest round of easing has pressured the USD.  If the Eurozone is to benefit there can be no slip ups on how they go about fixing their debt crisis.  They have not been able to do that in the past.  Can this happen now?  The next few weeks will be interesting. There are no more surprises on this side of the Atlantic.  The FED has acted.  Let’s see how this plays out.

There is no reason to expect the EUR to reverse its course today unless some bad news comes out of Cyprus, which is doubtful.  A close above the 1.3000 level today will be technically bullish.

Asian and European equity markets are all positive this morning and the DOW Futures are positive indicating a strong opening to the US equity markets.

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About Author

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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