The main catalyst driving the Euro higher is not Euro strength but dollar weakness. We know Bernanke is keeping rates low for 2 years, making the Euro much more attractive even with its issues. Yesterdays gap up in the Euro was most likely buying/covering in front of GDP numbers and the press conference today and investors positioning for a break out of this wedge. A positive for the Euro out of the press conference is the reluctance to expand EFSF - even though many feel like EFSF is currently too small to work, expanding the facility would further monetize and weaken the currency.
So why has the Euro failed to break the wedge? Weakness today can be blamed on the less than expected GDP out of Europe. Tepid growth will continue to weigh on the Euro in the short term because the ECB's focus will shift from rising inflation to a slowing economy and will now not only keep rates steady but may actually lower rates. I'm expecting the Euro to remain bound to the range depicted above and I will stay cautious on commodities until it eventually breaks out to the upside on dollar weakness. When it does - it could be tomorrow or in a month - I will buy risk assets with conviction.
Another factor contributing to dollar strength/Euro weakness in the short term is a possible retest of support levels in SPX (1172 and 1150) which I think is an important consolidation move before starting a sustainable rally. Today is a good start with energy and financials down 2%. As I mentioned yesterday, what we saw on Thurs-Mon was nothing more than oversold bounce. Worst thing you can do is chase it.
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