EURUSD (week: 12-16 Jun., 2006)

Last week, the dollar gained ground versus the EUR on a combination of hawkish Fed rhetoric and a somehow expected +25bps rate hike from the ECB (while some traders expected a 50bps move). Technically, the pair continued the retracement process started on May 14th, which finally broke the consolidation area around 1.27 and established new lows just below 1.26. Fundamentals continue to support the dollar in short-term, however we believe it is only a matter of time until the mid-term bullish trend is resumed. Thus, as the daily 50MA was broken and 4h charts look bearish, we may see the dollar testing support at 1.2550 (previous resistance on weekly) and even touch the psychologically important threshold of 1.25. However, any descent into the lower 1.25 area will likely make the EUR attractive again and fuel new buying waves. It is possible for the pair to develop a cluster support zone in the 1.2550 - 1.2480 area (1.2535 is also 38.2% fib of 1.1823 - 1.2979), which should stop further decline for now and support a new leg up later on, with primary objective at 1.2720, then 1.2830 and above.

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