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Forex: EUR/USD unable to trade above 1.2880; focus on ECB

FXstreet.com (San Francisco) - The Euro finally closed around the 1.2820 after being unable to break above the 200 days MA at 1.2880. After falling almost 1000 pips in two months from the February 1st high at 1.3710 to the last week low of 1.2755, the EUR/USD was trading on recovery mode to test the 1.2880 but the single currency remains fragile and kept the negative path.

The euro succeed at first hand, after a tug-of-war against the increased Cypriot based pessimism and the rising fears of contagion spreading to the rest of the peripheral members, namely Spain and Italy. In addition, despite Cyprus issue is not over yet, the late manufacturing PMI prints reminded investors how fragile the euro bloc fundamentals remain, casting shadows over the next Q1 GDP figures.

Rabobank analysts "remain sellers of EUR/USD on rallies for now," as they states in a recent report. The bank believes that with the Cypriot crisis and its banking issues, "investors has been dealt a strong reminder that the Eurozone crisis is alive and kicking."

"The impact of the Cypriot crisis on the FX market was not violent but EUR/USD was trading distinctly lower in the days after the bail-out then in the hours that led up to the deal being signed," points the Rabobank analysts team. Following Cyprus developments, "the concept of banking sector bail-in as an alternative to tax payer support in the event of a banking collapse is now settling into the awareness of Europeans."

Inside this panorama, the ECB will take the scenario on Tuesday. The TD Securities team believes that the ECB will be on hold by now. "The risk of rate cuts continues but we still seem not to see it this week." But "PMIs continue to disappoint and we see the risk of a rate cut as soon as May if the data does not quickly turn as the ECB's forecasts are looking too optimistic."

Has the ECB inaction priced in? However ECB could leave its rates and policy unchanged on Thursday, the Q&A session promises to bring in some fireworks regarding the last developments in Cyprus and the current weakness in the euro bloc.

Furthermore, the fresh vulnerability of the deposits – formerly considered ‘sacred’ – would be on centre stage, with Draghi expected to be bombarded by questions regarding that matter and the potentiality of its contagious effects.

What to come in the EUR/USD?

Heat Map euro dollar

With the EUR/USD closing negative on Tuesday, there are more bearishness in the scenario. Brown Brothers Harriman analyst Marc Chandler notes that "the next down side target is $1.2680, which corresponds to a retracement objective of the euro's rally sparked by ECB Draghi's comments in late July 2012."

Chandler adds that BBH remains "concerned that from a technical perspective the euro is stretched. The new four month lows were not confirmed by the RSI. Perhaps the 5-day moving average may offer some guidance." On Monday the EUR/USD trade as low as 1.2755.

When comes to technicals, Analyst Karen Jones at Commerzbank comments, “EUR/USD has spent the past few days consolidating below its 200 day ma and as a consequence maintains a negative bias. It remains on course for 1.2679/61, this is the 61.8% Fibonacci retracement of the July-to-January rise and the November 2012 low meet”.

Meanwhile, and in the short term, the EUR/USD is trading at 1.2820 with the next support at 1.2751 (low Mar.27) ahead of 1.2730 (low Nov.19) and finally 1.2680 (61.8% of 1.2042-1.3711). On the flip side, a break above 1.2886 (MA200d) would expose 1.2890 (high Mar.26) and finally 1.2943 (MA21d).

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