EUR USD – November Outlook

Since forming a closing price reversal top on the monthly chart in May 2011, the EUR USD has been under pressure. This pattern usually leads to at least a 50% correction of a previous range before reaching a short-term bottom.

In October the EUR USD pierced the 50% level at 1.3408 before settling slightly above the 61.8% level at 1.3145. Additional support was provided by an uptrending Gann angle which moves up to 1.3236 this month. As long as this angle holds as support the market has a chance to build a support base. A breakthrough the Gann angle is likely to trigger an acceleration to the downside.

On the upside, a downtrending Gann angle at 1.4460 during November has been providing the resistance. As you can see from the chart, traders have been walking the EUR USD down this angle since May. Since the market has clearly established resistance on this angle, consider this currency pair weak as long as it remains under this Gann angle. A breakout to the upside will be triggered once this angle is cleared.

Fundamentally the EUR USD received a boost when the European Union approved a plan to recapitalize the banks, restructure Greek debt and boost the fire power of its fund to prevent contagion. While this plan is only on paper at this time, the initial reaction was to the upside as traders felt there were enough positive steps to finally solve the sovereign debt crisis.

The euphoria created by the announcement was short-lived, however, as the end of the month neared. Problems in Greece and Italy began to arise as both countries faced the possibility of a government turnover. Greece also threatened to bring its debt restructuring proposal to a referendum vote. This action would have delayed or maybe negated the entire debt restructuring proposal. In addition the E.U. was threatening to hold back the next tranche of funding earmarked for Greece debt repayment.

As the new month begins the Euro is beginning to feel pressure due to mounting uncertainty. Looking back the almost month long rally appears to have been a “buy the rumor, sell the fact” situation. As long as uncertainty remains, bullish traders are unlikely to return to the market, leaving the EUR USD vulnerable to near-term pressure.

In addition, traders should watch the developments in Greece and Italy for direction. If both governments fail to agree to the austerity terms laid out by the European finance ministers then sovereign debt risk could soar, leading to a possible collapse of the Euro.

Even if Greece approves the new restructuring deal, Italy must agree to the austerity measures otherwise this country may also require a bailout. This process could continue with Spain, Portugal and Ireland also. Clearly the debt problems have not been contained as hoped for by the announcement of the new proposals. This makes the EUR USD susceptible to further downside exposure.