Overbought Euro Set-Up For Near-Term Retracement

Two weeks after the September euro fulfilled the first objective of its closing price reversal from the recent main bottom at 1.2051, the futures contract continued higher, first mounting a challenge of the Fibonacci retracement level at 1.2489, then surging through it to 1.2593.

Although taking out the short-term retracement zone of 1.2405 to 1.2489 this past week was impressive, the failure to change the main trend to up with a trade through 1.2759 indicates that there are still sellers out there. Additionally, the single-currency found resistance at a downtrending Gann angle from the July 2011 top at 1.4591. This angle was at 1.2551 last week and drops down to 1.2511 this week.

Now that the euro has failed in its first serious attempt in several months to turn the main trend to up on the weekly chart, the market may be poised to retrace the recent short-term rally from 1.2051 to 1.2593. This potential downside target zone is 1.2322 to 1.2258. An uptrending Gann angle from the 1.2051 bottom is at 1.2211 this week and 1.2251 the week-ending August 31.

Even if the euro pulls back into this short-term retracement zone, it could attract fresh buying even though the main trend is still down. If new buyers can produce enough upside momentum, the market may even mount a challenge of the retracement zone created by the 1.3304 to 1.2051 range at 1.2678 to 1.2825. The catalyst for the momentum will be a clear breakout through the downtrending Gann angle at 1.2511.

After posting solid gains last week mostly because of the weakness in the U.S. dollar, the euro is finishing the week on a down note as speculators continue to sort through last week’s Fed minutes and possible bearish news regarding Greece. European officials are meeting to discuss Greece’s progress toward reducing its expenses as well as renewing its ability to pay back its debt to the euro Region nations. If Greece can re-establish its credibility then it may seek to extend its fiscal targets by two years.

With the next European Central Bank meeting about two weeks away on September 6, there is plenty of time for nervous traders to pare positions ahead of the central bank’s next major decision. At issue is expected to be the ECB’s latest plan to renew its bond purchasing program that at a minimum will be designed to pressure Spanish and Italian interest rates.

Some traders feel that there will be a deep discussion regarding including peripheral nations in the next round of bond purchases. If peripheral nations are included in the new deal then the euro could soar. Until then the euro may feel some downside pressure as the lack of clarity could trigger a profit-taking break and a near-term correction.