Euro Reverses Overnight Rally; Set-up For Short-Term Retracement

The September euro extended its gains early in the trading session on the heels of surprisingly impressive U.S. employment numbers before reversing to the downside. Volatility remains high so traders should do their best to make adjustments to their trading strategies.

There is some debate as to whether the euro was strengthening or the U.S. dollar was weakening. There was some news regarding Spain on Friday that may have given the single-currency an intraday boost, but that story was unconfirmed. Additionally, open position analysis suggests that short positions have dropped to their lowest level in several weeks. This may limit the amount of short-covering over the near-term.

Now that the key U.S. jobs report is history, traders will be on alert for any news regarding aid requests from Spain or Italy. On Friday, the Euro rallied after reports surfaced that Spain was going to make a formal request to tap the European rescue fund. Short-term two-year Spanish bonds rallied on the news as wells as rumors that the European Central Bank was interested in the short-end of the curve. Interest rates also fell in Italy.

Global investors turned bullish on Friday as demand increased for higher-yielding assets but they could not sustain the momentum created, leading to this session’s sharp intraday reversal. Comments from Spanish Prime Minister Mariano Rajoy helped dampen demand for the euro. He said that Spain had made no decision yet and was waiting for the ECB to better outline its bond-buying plan.

Technically, the September euro reversed the main trend back up on its early session rally, however, after turning lower intraday is now in a position to correct back to its main retracement zone. Based on the near-term range of 1.2051 to 1.2450, traders should watch for a pull-back into 1.2251 to 1.2203. An uptrending Gann angle is at 1.2231. This makes 1.2251 to 1.2231 key support cluster today.

Earlier in today’s trading session, the euro turned bullish when it crossed a previous main top at 1.2413. Further upside action was indicated when the market crossed a major 50% level at 1.2405 and a downtrending Gann angle at 1.2419.

Since the main trend is up and many short-traders have been taken out of the market due to its recent volatility and strength, buyers may step in on the retracement, leading to further upside action.