As we noted Thursday, the technical set-up of the Euro/$US exhibits the requisite conditions for the establishment of a near-term bottom, followed by a relief rally to 1.3750-1.3800 in the upcoming hours/days. Let’s notice now that the euro is approaching initial resistance at 1.3720/50, which should give us a good gauge as the strength of the euro rally.
That said, we all recognize that within such a powerful intermediate-term downtrend that fundamental surprises likely will trigger euro selling, which has been the case for the past two weeks – within the oversold condition. Nonetheless, the short euro trade is becoming increasingly crowded and vulnerable to a sharp, quick short-covering spike towards 1.3800 and possibly 1.4000 prior to the sustained resumption of the dominant downtrend.
Gold should benefit as the euro strengthens, as we noted in detail in our Charts of the Week this week and in our chart analysis of the Market Vectors Gold Miners ETF (NYSE: GDX) and SPDR Gold Shares (NYSE: GLD).