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A quiet start to the week as EUR/USD continues to consolidate just below 1.3000

FXstreet.com (Barcelona) - The EUR/USD finished the previous week moderately higher, holding critical support located around 1.2800 and closing up 112 pips at 1.2932. It was a roller coaster of a week as Chairman Bernanke was set to testify in front of congress which heighted volatility. However, the real catalyst for moving the pair higher seemed to show up on Thursday as important economic data from Europe came in better than expected. It will be quiet start as we progress throughout the day with both the UK and US being closed for holiday.

According to analysts at Rabobank, “on the economy front, Germany’s 1Q GDP expansion was confirmed at 0.1% QoQ in the second release of these data. This is the same as the earlier estimate. In terms of the composition of growth, private consumption was stronger than expected, increasing 0.8% QoQ. A rise of 0.3% was anticipated.”

They went on to add, “Germany also released the monthly IFO for May and it was a bit better than expected. The Current Assessment index rose 2.7 points to 110.0. This is the highest reading in three months and puts the index above the 1Q average of 109.4. The more forward-looking Expectations index was steady at 101.6, the same as April.”

Other analysts are pointing towards last week’s comments from Fed Chairman Ben Bernanke and other regional Fed members for clues to the future direction of the pair.

According to Mansoor Mohi-uddin, Head of Foreign Exchange Strategy at UB, “Financial markets have become unnerved by the prospect of the Federal Reserve slowing down its $85bn a month of asset purchases. But Chairman Bernanke in his testimony to Congress, speeches by Federal Open Market Committee members and the latest FOMC minutes all suggest the Fed isn't ready yet to start 'tapering' its third round of quantitative easing.

Mohi-uddin went on to add, “Despite the uncertain outlook, Fed officials appear more willing to reduce rather than increase the pace of quantitative easing. St Louis Fed President Bullard, a voting FOMC member this year, said the central bank was more likely to slow down its pace of easing. Bernanke said 'if we see continued improvement and we have confidence that that is going to be sustained then we could in the next few meetings...take a step down in the pace of purchases.' We expect the greenback to keep heading higher towards our end year forecasts of 1.20, 110, 1.41 and 1.03 against the euro, yen, pound and Swiss franc respectively. In the holiday-shortened week ahead, investors should pay attention to the latest core PCE inflation release.”

On a final note, given the volatility the Japanese equity market has been experiencing the previous three trading sessions, market participants should keep an eye on both European and US equities in case some of selling spills over to each of them. A “risk off” mentality in coming weeks would likely not bode well for the EUR/USD.

In regards to the technical set up, the daily/weekly charts remain very range bound as evidenced by the mixed signals between short term moving averages, as well as the RSI (14). Furthermore, the ADX (7) remains slightly downward sloping and at a value of 22 indicating a primarily trading range bound market. Some analysts are looking to the short term charts to see if there are any hints or levels that might dictate future direction of the pair.

According to Val Bednarik of FXStreet.com, “market opens where it left on Friday as the weekend bring no major events. And with London and New York on holidays this Monday, market will likely remain extremely thin. The EUR/USD hourly chart shows price steady around a flat 20 SMA, while indicators hover around their midline, signaling the little volume around since past American session over the long weekend. However, a slightly positive tone persists with price finding buyers on dips towards 1.2900 area. In the 4hours chart, the outlook is quite similar from the technical point of view, although selling interest is still firm in the 1.3000 area.”

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