EUR/USD: How Far Can the Rally Crawl?

By: Andrei Tratseuski

Prompted by a successful Spanish Auction, the Euro accelerated its gains. As we have mentioned prior, successful bond actions within PIGS spur risk appetite demand and maintain confidence in the Euro. Spain sold off nearly €3 Billion of longer term bonds with a very stable 2.57 bid to cover ratio. The robust demand in the bonds puts another breath into the Euro as investors support a predisposition that their funds are safe from default. The only negative portion of the event was a sharply higher yield on 15 year bonds which printed 69 basis points higher than the previous month at 5.12%.

Another driver for the Euro to the upside is weaker US data. Deflationary fears have exacerbated into a sickening nausea. Analysts as well as investors, fear that the worlds leading economy might slip into the deflationary spiral are overwhelming. The biggest fear of course is the same outcome which has happened in Japan. Producer Price Index fell by half a percentage, stating that deflationary pressures are developing. Industrial sector is growing at a slower pace. Philly Fed printed at 5.1 compared to 10.2 anticipated. Industrial Production grew only at 0.1% throughout the same time frame.

However, the Euro is rallying with no remorse. The following rally will eventually come to an end. So here we will look for a detrimental resistance levels. One of the most important overhead resistance levels which may stall the progress of the Euro to 1.30 threshold is a Fibonacci extension. A prudent level to look at will be 1.2940, a 127.1% extension of yesterday's high and low on hourly charts. The following level is detrimental to break in order for the rally to proliferate.