The euro is not oversold from a daily perspective but it is approaching some solid support levels that could provide quality buying opportunities.

On Wednesday, the euro’s nearly 300 pip fall against the U.S. dollar was the largest one-day fall since September of 2008. That’s worse than any single day during the European debt crisis. Without doubt, we see the euro moving lower from here in the medium term. In the short-term, however, we are nearing uptrend support and support from the June low of 1.2737.

We could see a further slide close to support on Friday, especially if U.S. retail sales disappoint. But looking to next week, there is very little on the data docket to spook the broad market. To us, that skews the risks toward a mild recovery trade. With that in mind, we would look for opportunities to buy the euro at below 1.28 with the expectations that we will see a re-test of 1.30 in the week ahead. If the euro does return to 1.30 we will be quick to take profits and initiate short positions for an eventual fall to new lows.

Our initial reaction to the stress tests is disappointment but we think the trade is to buy EUR/USD with a stop at the session lows. We would have liked to see a better stress test that included all the sovereign debt on banks books (rather than just the trading book). But what’s priced into the market? There is a €700 billion backstop on sovereign debt in Europe so there will not be a default. With economic data improving the market is pricing in a diminished chance of a double-dip recession so that is unlikely as well. The euro is down 60 pips to 1.2832 on the slightly damaged credibility of the ECB but we thought the U.S. stress tests were a sham as well (they forecast 9% unemployment in the adverse scenario). The market will turn its focus back to European and U.S. fundamentals and we believe that will reflect positively on EUR/USD in the short-term. Stop at the session lows but look for an eventual rally to 1.32. Remember that in a sentiment-driven market anything is possible so stay nimble.

The U.S. dollar has become the dog of the foreign exchange market and we expect the EUR/USD to continue rallying after a short pullback. The USD eked out only small gains against only the CAD and AUD on Thursday and experienced substantial declines against EUR, GBP and JPY. The market is beginning to grab hold of a theme that the U.S. economy will underperform expectations. Although we have seen a slight rebound from the dollar early on Friday, the overarching theme remains.

The trigger for the sudden surge in USD selling was Wednesday’s minutes of the June 22-23 meeting. In them, the Fed lowered growth forecasts and said the U.S. economy may not fully recover for 5-6 years from the Great Recession of 2007-09. Richmond Fed President Jeffrey Lacker, who is usually optimistic, even allowed that the U.S. will recover “perhaps at a pace that is less robust than has been typical of past recoveries.” Financial regulation reform, which passed on Thursday, is also making the U.S. a less competitive hub of global finance.

At the same time, the focus is shifting away from Europe. A recent sovereign downgrade of Portugal by Moody’s elicited hardly a blip in the forex market. On Thursday a successful Spanish bond sale further reinforced that a euro breakup and sovereign defaults are no longer a pressing concern.

The huge rally in EUR/USD yesterday pushed the euro above the 100-day and 100-month moving averages and points to a continued recovery in the euro. Expect the consolidation that has begun in Asia to continue as the week comes to a close. The RSI isn’t overbought and there is plenty of technical fuel for a rally but the odds favour intraday shorts on Friday.

Today’s price action was the signal we were looking for to mark the top in EUR/USD. We had a blowout to the upside that has aggressively reversed.

The main news of the day is that China will allow the yuan to appreciate against the USD. Analysts are scrambling to interpret the news and the market has been equally undecided. The U.S. dollar has been a main beneficiary on sentiment that U.S. manufacturing will be more competitive. Initially, the stock market liked the news but a stronger yuan probably means slower worldwide economic growth so that sentiment appears to have taken over.

The idea that China is curbing growth and inflation is weighing on the EUR. There is also a feeling that the entire up-move in EUR/USD was fuelled by short covering. CFTC data released late Friday shows a massive contraction in EUR net shorts so there is evidence that the slump has been little more than position squaring.

The daily chart now shows a downside reversal. We also see an inverted hammer pattern. Confirming the downside is the resistance at the top Bollinger Band, the RSI and the 50-day moving average.

The euro has started out the week by rising the highest since June 4 as it builds on a rally for the past week.

Over the past six months it has been rare for the euro to string together several up-days. We remain extremely bearish on EUR and will be using this bounce as another opportunity to sell. The question is: when is the right time to sell EUR/USD?

We noted the IMM data released on Friday. It showed EUR net shorts near record just shy of a record high. Remember that IMM data is from the prior Wednesday (in this case June 11). On that day the euro traded at 1.19 compared to 1.2178 currently.  That points to a short squeeze over the past few days. But with the market positioned so agressively short, the squeeze could still have some way to go.
We see three simple targets. 1.2334, 1.2467 and 1.2691. We don’t see the highest target as realistic. Market participants are so bearish on EUR that it will be sold long before it hits 1.26.

Looking at the Ichimoku Cloud on our 4-hour chart we think a somewhat agressive move higher to 1.2567 is possible if we get a close above the top of the cloud (on a 4hr chart).

We will have our sell orders ready, however, once it gets above 1.2334.

Note that the European Union is hosting a summit beginning Thursday. The market will be looking for signals about fiscal austerity and plans for further market intervention.

The head and shoulders patter we warned about last week was finally completed in EUR/USD as the pair broke down in spectacular fashion today. The catalyst were comments from a spokesman for Hungary’s Prime Minister who said the nation is in a “grave situation” because the previous government “manipulated” data and “lied” about the state of the economy. Turkey isn’t a part of the euro but is on the periphery of the zone. Worries about Spain also ignited and credit default swaps around the region soared.

Technically, EUR/USD continues to be in bad shape. We have frequently advised selling this pair and always advise following the trend. As everyone knows by now, the trend in EUR/USD is lower. We watched over the past week as a host of economists, strategists and commentators advised buying euros. Obviously, they were wrong.

The only question is: how far will the euro fall? The market has squared its focus on the late-2005 low of 1.1639. As we previously mention, this corresponds with the measured target of the head and shoulders pattern.

We think that any entry point is a good one for the coming week but, as the RSI shows, we are oversold on the two hour chart.  It would be no surprise to see a rebound to 1.21 late on Friday or early next week. This would represent a great entry point provided you could withstand a potential short-squeeze to 1.23, which would be our stop. The whole trade represents a potential profit of 450 pips and a loss of 200.

The euro once again turned lower today on reports that Spanish banks are unable to borrow and a story in the Financial Times suggesting that Safe — the Chinese government investment fund at holds an estimated $620 billion in euroarea debt — is worried about its investments in Portugal, Italy, Ireland, Greece and Spain – the so-called PIIGS.

The euro tumbled on the news and has fallen below initial support at 1.2177. The cycle low of 1.2144 could be breached imminently and that would be a very bearish signal for EUR/USD.

The pattern that points to further losses is also a classic head and shoulders formation.

The neckline has already been breached and the negative outlook would be confirmed by a fall below 1.2144. The measured target of the head and shoulders is 1.1683, which dovetails nicely with the 2005 low of 1.1639.

Overall, the fundamental and technical reasons are in place to be short the euro. Sell any bounce.

We are trading very well at the moment. We have repeatedly warned about the Australian dollar and our downside targets against CAD and USD have been met. We were impressed by the continued weakness against the euro today and it looks like the bearish phase in the euro against the commodity currencies might be coming to an end.

Today, we want to focus on gold. For years we have been skeptical of gold bugs and their prognostications of $5000 gold. It’s a group that’s filled with conspiracy theorists and worry-mongerers.

In the last siz months, however, we have grown more and more convinced that the gold rally is just getting started. Sovereign debt worries are for real and many countries will eventually give in to inflation as a solution to their overspending. The implications are unambiguously bullish for gold.

After reaching all-time highs last week, gold has slumped. For us it’s not a matter of buy or sell, it’s only a matter of when to buy and when to take profits. At the moment we are looking for buying levels.

We see that the RSI has fallen into oversold territory but it could still fall lower. On the downside we have the fibonacci lines at roughly $1170, $1150 and $1120.  We also see various trendlines with the most meaningful one (to us) at $1140 currently. On the whole, we see a great deal of support in the $1120 – $1170 range but support thins out below that.

We will be stacking up buy orders in this range on the possibility of a quick spike toward the bottom of the range. If we see a fall below $1120 we may be forced to reconsider.

Yesterday we pointed out the weakness in the Australian dollar and noted the bearish patterns. AUD/USD went on to fall badly. Today, we are looking at EUR/AUD and an interesting weekly chart.

The downtrend in this pair has been clearly and cleanly in place for 10 months. On Wednesday we went from the bottom of the range to nearly the top in a one-day 600-pip move. This is a positive for the euro on this cross but it doesn’t yet signal a reversal. Instead, it looks more like a short squeeze. Watch for a test of the top of the range in the day ahead but look for heavy selling around 1.50. Gold is very important to this pair. With the $30 fall in gold on Wednesday, we are cautious of a further pullback, which would be bearish for AUD.

The currency market seems to have disconnected from stocks, bonds and the broader correlations are stretched. The AUD and NZD were beaten down badly today while the EUR and GBP rallied, throwing a wrench into the risk-aversion/risk-appetite trade. We have to note that when correlations start to break down, as we’re seeing, it’s a sign of very high uncertainty in markets. It often leads to high volatility and quick moves. We see no end in sight to the incredible trading opportunities that are presenting themselves every day.

The Australian dollar is nearing critical support and in danger of falling to an eight-month low. There are signs of oversold conditions as we near support at 0.8578 and a bounce is possible. A sustained break below that level would be very bearish.

We also have to address the euro, given the events of the past 24 hours. We were constructive on the euro’s fortunes heading into yesterday’s session. We saw the potential for a bounce to 1.27 or even 1.31 on extremely oversold conditions. The market was tracking higher for most of yesterday’s session as the market touched 1.2445 but the legs were kicked out from under the euro after Germany banned certain types of short sales. German financial regulators banned naked short sales of exchanged traded euro area debt, credit default swaps and on the shares of 10 financial institutions. In the medium term, this is very bearish and the market closed below our sell line at 1.2330. We will look for levels to enter short positions.

The Australian dollar was beaten up badly on Tuesday and continues to face pressure so far today. Notice how close we are to the 8-month low.

We have fallen very quickly in the past two weeks. After the panic low on May 6, we have rebounded only to trace out a fresh low. That price action is bearish, no doubt.

We have to point out that the RSI is flashing a very oversold signal. In this case, we will ignore that signal if we see a sustained move below the 0.8578. The measured target of the drop would be 0.7754, there is also support at 0.7702.