Euro Reaches Retracement Support

The three day break in crude oil continued to provide support for the Dollar while sending the EUR/USD into a major retracement zone.

Based on the main range of 1.5610 to 1.6038, the Euro is expected to see fresh buying on a break back to 1.5825 to 1.5774.

On Thursday, this pair reached a low of 1.5783.  The close off the low indicates that short-term profit-takers or fresh buyers entered the market.  The current set-up suggests a rally back up to 1.5911 to 1.5941.

The next retracement up will have critical ramifications for the longer-term view of the EUR/USD.  The new high this week to 1.6038 did not bring strong buying into the market, indicating the possibility of a top.

The subsequent break stopped in the projected area.  The next move up is critical.  Based on the two-day break, this market is expected to retrace back to 1.5911 to 1.5941.

If the market finds sellers in this zone and breaks, then a secondary lower top will have been made.  All that would be needed to turn the trend down would be a break through the swing bottom at 1.5783.

Higher energy prices, poor economic reports, and dropping consumer confidence are three reasons to believe the Euro Zone economy is beginning to weaken.

Trichet's decision to raise rates to 4.25% in early June may have been the final blow to the economy.

During Thursday's New York session, the good news from J.P. Morgan helped relieve some of the bearishness which had been building in the Dollar;

However, aftermarket news regarding a Merrilly Lynch downgrade may be the catalyst to send the Euro higher overnight.

Coupled with the Citigroup earnings report on Friday, more bad news can send the Euro into the key resistance zone mentioned earlier.  This is the action to look for today.

The high correlation between the Euro and crude oil could be a factor on Friday also.  The down move in crude may have been too much too soon and a short-covering rally may be due. In addition, option expiration can cause an erratic volatile trade.  If crude oil trades higher, it is likely to take the Euro with it.

In summary, watch the EUR/USD to have a bias to the upside on Friday with an objective of 1.5911 to 1.5941.  

Citigroup news and crude oil are expected to be the catalysts which could help support a rally.