Despite settling into a small range during the month of December following a sharp break from 1.4263 to 1.2955 during November, the March Euro still remains vulnerable to additional downside pressure.
Based on the June low at 1.1866 and the November high at 1.4263, the retracement zone at 1.3064 to 1.2781 remains the key downside target and support zone. The most recent low on the monthly chart is at 1.2955 which was technically a successful test of the 50% price level at 1.3064. If this low continues to hold as support, then watch for a potential short-term retracement back to 1.3609 to 1.3763 before serious selling pressure resurfaces.
While technical traders are looking at the current narrow trading range as a reaction to short-term oversold conditions, fundamental traders are watching the markets for any signs of improvement in countries continuing to face fiscal issues such as Spain and Portugal. Much of the break in the Euro during November was blamed on Ireland’s financial problems. Now that they seem to have been diffused, all traders can do is cover a portion of their short positions while waiting for some news out of Spain and Portugal. The common reaction since the Greece situation reared its ugly head in 2010 has been to sell first and ask questions later. Whether the Euro rallies back to 1.3609 to 1.3763 to set up the best technical short, traders should be aware that any negative developments in Euro Zone member nations are likely to attract fresh selling pressure regardless if the Euro is in the retracement zone or not.