Forex Trading: Euro Could Strengthen Further Against The US Dollar If S&P Continues Its Ascent

The EUR/USD is cooling off after propelling past the psychological 1.35 level and our critical 3^rd tier downtrend line.  Built off of 12/18/08 highs, our 3^rd tier downtrend line represents our final downtrend line for the time being.  We believe the defeat of our 3^rd tier downtrend line is a key development fundamentally and sends a loud bull message.  The burst of energy to the upside in the EUR/USD came after a better than expected German Industrial Production number in conjunction with continued optimism over the EU’s use of alternative liquidity measures.

However, the EUR/USD is heading south Monday after both French and Italian Industrial Production data came in below analyst expectations.  Therefore, the dynamic EU economy is sending a mixed message.  Despite today’s pullback, the EUR/USD made a very bullish move last week.  If the currency pair can manage to stabilize above our 3^rd tier downtrend line and head north again, we could see more large gains in the near-future.

Meanwhile, the S&P futures are trying to build a new foundation above 900 to create a reliable defense to the downside in the event of future gains.  The health of U.S. equities is always vital for the EUR/USD since the two are positively correlated.  Therefore, if the S&P continues its ascent, then the EUR/USD could gain some nice momentum to the upside.  Thursday and Friday’s gains were backed by substantial volume, giving validity to the currency pair’s present outbreak to the upside.  March highs should provide a near-term obstacle to the topside.  An eclipse of these highs could excite near term gains.

As for the downside, keep an eye on our 3^rd tier downtrend line.  For if it doesn’t hold, the EUR/USD’s breakout could be compromised.  We maintain our bullish outlook on the EUR/USD due to its positive fundamental progress in conjunction with the strong performance of U.S. equities.  It appears we could be discussing the approach of December 08′ highs in the medium term.

Fundamentally, we find resistances of 1.3592, 1.3617, 1.3652, 1.3680, and 1.3702.  To the downside, we see supports of 1.3573, 1.3545, 1.3519, 1.3492, and 1.3455.  The 1.35 area serves as a psychological cushion with 1.40 acting as a psychological barrier.  The EUR/USD is currently exchanging at 1.3580.

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