The Euro is attempting to go
above the level of 1.38 to the US dollar, which it also tried to do, without
success, on a number of occasions last year. The last time the pair traded
above 1.38 was back at the end of 2011, over two years ago. All of this makes
1.38 a significant resistance.
So we have to ask: What might
cause it to break out from here to the upside? The most likely answer will
probably have to do with the attitude of the European Central Bank to the
threat of deflation. This is something of which they are in dire dread. The
Eurozone CPI (Consumer Price Index, a measure of inflation) was at 0.8% last
week. This marked an ever-so-small increase on the previous reading, but it was an increase, and this reduces the possibility that M. Draghi and his colleagues
will enact extraordinary measures later this week to increase inflation to at
or close to the 2% level that they regard as ideal. Any such move would tend to
weaken the Euro.
The Single Currency has
proven to be resilient in the past. Even a reduction in the base lending
rate was shrugged off by the market when it was enacted last November.
The other side of the EURUSD
equation is, of course, the US dollar. The excuse that has been used for weaker
than expected US economic indicators, extreme weather conditions Stateside, has
been given so often now that it is grown a little thin, which means that
anything other than a really dramatic increase in Non Farm Payrolls, which are
due out on Friday, will be bad for the Greenback.
Resistance turns to support for Sterling
In a classic, text-book
example of how support and resistance often plays out, the strong and
long-standing resistance we have highlighted in
the case of the British pound / US dollar pair (GBPUSD), also known as “Cable”
because of the fact that this instrument was the very first one to be used for
electronic currency exchange, back in the days when such activity depended on
an undersea cable across the Atlantic, has now turned into support. This can be
seen on the daily chart above, which we have marked with the current level of
the monthly 200-period SMA, which is the resistance level in question, as
discussed in past commentaries.
The mechanism behind this
phenomenon has to do with market psychology. Traders have memories and the
collective effect of decisions that were made in response to technical analysis
indicators in the past influence current position placement. The end result of
this is that former resistance often turns into support and former support, on
the way down, can turn into resistance. In those cases where the support or
resistance holds (in other words the transformation of one into the other is
not sustained), double tops and bottoms, well respected price patterns in
themselves, come into being.
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