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EUR/USD - More volatility expected with EU PMI on tap

FXstreet.com (Barcelona) - It was a volatile day for the EUR/USD, which was not surprising given the amount of economic data coming out of the US during the previous session. To kick things off, we had Fed Chairman Bernanke’s testimony in front of congress which started at 14:00GMT and sent the EUR/USD on a roller coaster ride, initially trading as high as 1.2998 before sharply reversing all gains and closing down 53 pips at 1.2852. Later in the day, we received the the most recent FOMC meeting which gave the pair a small bounce but not near to recover from earlier losses.

According to analysts at NAB Global Markets, “investors looking for clues on US monetary policy would have taken very different messages from Fed Chairman Bernanke’s prepared testimony and his subsequent Q+A session. The formal presentation warned that, “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.” Yet, in response to questions from Congressmen, we heard that, “If we see continued improvement and we have confidence that that's going to be sustained, then we could, in the next few meetings…take a step down in our pace of [asset] purchases.”

It should also be noted the EUR/USD wasn't the only pair to sell off after comments, with the US Dollar going well bid across the board and the majority of 'risk on' assets including both stocks and commodities suffering declines. Although today was extremely volatile, looking for volatility in the pair to again pick up during the coming European session in which we will a number of important EU PMI figures released start just below 7:00GMT. Should this 'risk off' market mentality across equities continue, it's hard imagine the EUR/USD having much luck with follow through to the upside in the coming sessions.

According to Kathy Lien of BK Asset Management, “A large part of the recent sell-off in the euro was caused by concerns about the health of the Eurozone economy – because the region is in recession, the ECB felt the need to ease monetary policy. If tomorrow’s Eurozone PMI numbers show improvement, then the hope for a brighter tomorrow will make 1.28 a near term bottom.”Given the rise in equities, the slide in the euro and the rebound in industrial production and factory orders, we expect to see some improvements in the region’s economy. Yet the data could still surprise to the downside and if it does, the EUR/USD could break below 1.28.

Given all the head line driven trading expected, some analysts are looking at the shorter term time frame charts in order to find important develops and levels which may have influence on the pair in the coming European session.

According to Val Bednarik of FXStreet.com, ‘the EUR/USD reached 1.2997 after Bernanke started its testimony with a dovish tone, only to sink to a daily low of 1.2832 before facing buying interest. The hourly chart shows price consolidating right above the level, with indicators aiming to correct extreme oversold readings and 20 SMA heading south above current price. In the 4 hours chart a stronger bearish tone is developing, although 1.2800/40 area continues to attract buyers, and only a clear acceleration below these last will point for a stronger downward move’

From a longer term perspective, both trending indicators (short term moving averages) and the RSI (14) remain in bearish set up which could continue to limit advances the rest of the week. The weekly chart is still carving out a massive head & shoulders pattern, with the neckline located down near the 1.2770 area. Given the fact the pattern has been forming since early Sept 2012, market participants should not overlook the bearish influence it may have should we get confirmation on a closing basis.

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