Pound and Euro Price Action Points To Possible Further Downside Movement
Tue, Aug 31, 11:21 AM ET, by ForexTraders.com
The EUR/USD and GBP/USD have both continued to move inside of relatively tight trading ranges over the last 2 weeks as investors try to formulate a game plan for the second half of 2010. Economic signals are quite mixed with the United States facing a severe slow-down in the economic recovery, but the EuroZone appearing to move forward at a steady pace. You have Fed Chairman Ben Bernanke saying he will pump more stimulus into the U.S. economy, but you have European Central Bank President Jean-Claude Trichet saying that Central Banks should inject no further stimulus and instead focus on trimming huge budget deficits. These mixed signals in the global economy regarding the current global economic recovery are causing investors to be a bit unsure of which direction the market should go. EUR/USD 
The euro has been in a very tight 150 pip range of consolidation since August 20th. All of last week and this week, investors have been unwilling to break the HI's and LO's of this trading range. Many economists and large fund managers have been calling for the euro to weaken significantly versus the dollar before year's end. The primary reason is because the sovereign debt crisis in the EuroZone is expected to resurface at some point this fall as the austerity measures in Greece, Portugal, Spain, Italy, and Ireland begin to weigh heavily on economic growth and drag the EuroZone back into a period of very slow growth or even recession.
However, the drop in the euro was not quite expected to be this soon. But as we have dropped from the 1.3300 level, the current price action on the euro over the last 2 weeks is definitely pointing to lower levels.
You can see on this chart that as price fell from the HI's of 1.3300, it fell very sharply. When you have that degree of vertical selling followed by a flat correction at the bottom of the move, it most often means that price is going to make another leg to the downside. As you can see, price is definitely consolidating at the low of the move, which is a classic signal that lower levels will be seen in the near term. Of course, the euro has major support at 1.2600, but once it can break the 600 level, the next area of strong support is not until 1.2430, which is the 62% retracement of the entire move up during June and July from the LO of 1.1875 to the HI of 1.3330. This area should offer strong buying interest if the euro does come down there this week or next week. However, as the euro has fallen from its HI's of 1.3300, you can see that both corrections have been very flat, with very little buying interest. At the moment, things are not looking very good for the euro technically. GBP/USD 
Pound price action has been very similar to that of the euro. Price has dropped quite significantly in August, and now since August 20th, the pound has moved in a relatively tight 200 pip zone of consolidation. The pound has diverged from the euro quite heavily in London trading today, though. As the euro has moved back up toward the top side of the range, the pound has moved down on the day to retest support at 1.5375. The pound looked very bearish in early NY trading as it touched a low of 1.5362 before finding support and moving back up toward 1.5400.
As the pound continues to put pressure on the 1.5375 area, we need to see a convincing close on at least the 1 Hour chart to confirm further downside movement. However, once that downside movement is confirmed, the pound has plenty of room to fall. The first area of minor support is at 1.5325, which is the 38% retracement of the entire move up during June and July on the Daily Chart, but the strong support that has been formed at 1.5370 may nullify the strength of that line if we begin moving to the downside. The next area of strong support will be should be at 1.5120, which is the 50% fib and a strong area of support/resistance. Current price action on the pound is looking quite bearish as there has really been no buying interest in the pound as we have fallen from the HI's of 1.6000 during the month of August. U.S. Consumer ConfidenceConsumer Confidence came out quite better than expected today at 53.5. The expected figure was 50.7. This number is a good sign for the U.S. economy. Lately, most key economic data has been coming out very negative, and consumer confidence is a huge determining factor of economic strength. When consumers do not have faith in the economy, the economy tends to get even weaker as consumer demand drops and causes economic growth to falter. This number today should help to restore a bit of confidence in financial markets. At this point the fear and general lack of direction in financial markets is not going to be cured by 1 positive economic report, but it definitely will not hurt. In the FX Market, risk currencies such as the pound and euro immediately strengthened versus the Dollar, but those gains were quickly given up and the market began to move sideways. More positive reports will needed throughout the remainder of the week to truly abate the current fear that is present in financial markets. FOMC ReportFOMC Minutes will be released at 2:15 pm this afternoon, and the report is expected to reinforce the general dovish tone that has been coming out of the Federal Reserve for the last month. When the FOMC report follows directly on the heels of a public speech by Fed Chairman Ben Bernanke, as this one does, it tends to have less of a market impact, so we may not see too much movement this afternoon as a result of the Minutes. However, if there is any surprise concerning monetary policy decisions for future rate hikes, then we could see some volatility enter the market, but the probability is quite low.
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