EURUSD v Debt crisis

Over the past couple of weeks, with the latest leg of the on-going European Debt crisis hotting up, I have heard from a number of traders telling me that the EURUSD is about to collapse, a view which I must admit I have had some sympathy to. However, despite the market throwing the proverbial kitchen sink at the troubled Euro, it has once again seemed to defy the wishes of many and shown remarkable resilience.

I decided to see whether there has been a decent visible' correlation between heightened European Debt fears or not over the past year.  The chart below, shows the EURUSD (top), versus Spanish 10 Year government bond yields (bottom). - What seems apparent is a lack of any visible correlation between panics on Spanish debt (yields rising) and the value of the EUR versus the USD over the past year. -  During the summer panic the EURUSD remained sidelined in the low 1.40s, during the October - December Panic the EURUSD started and finished in the low 1.30s, but did spike up to over 1.4000. It would seem that the damage to the EURUSD tends if anything to follow in the wake of action taken to allay the panic. The current panic, whether it is over or not, does seem to be following along similar lines so far, with the currency remaining resilient just above 1.3000.

EURUSD Short-term and USDJPY - Possible Weekly Reversal Candle.

The EURUSD has posted a very good recovery over the past 2 days, having bounced from within the 1.2722-1.2777 zone which I highlighted as support last week (can be seen here ). Short-term charts are showing a possible 'Inverse Head and Shoulders' pattern, with a target at just over 1.3000, the pair needs ideally to hold over 1.2850 for this to stay in play.  On the other hand, a sustained move back below 1.2820 opens up the possibility of a re-test of last week's low. - Bigger Picture, the outlook remains uncertain for now, though the 1.2720 support could be pivotal, the longer it can hold on above that level, the greater the chances of the EURUSD posting a more meaningful recovery. See chart below for EURUSD.

Last week I highlighted that there were some signs of a potential USDJPY reversal. The USDJPY managed to close the week above 86.00 despite posting a low at 84.73, its lowest level for 15 years. However this move over 86.00 has proved very short lived, with a quick move back to the low 85.00s. - Nonetheless, last week's price candle did produce a potential reversal candle, which suggests a chance of a deeper correction may be on the cards, though unless this can bounce quickly, it will remain a low possibility.

- The weekly candle produced was a bullish 'Piercing Line' candle. However a decent close this week would be needed to confirm this. A failure to produce a higher weekly close, or a move back below 85.12 (76.4% retrace and this morning's low), would probably mean this was a failed signal.  The insert below describes a 'Piercing Line' candle whilst the upper weekly chart below shows the occasions where 'Piercing Lines' occurred on the USDJPY over the past 5 years. Note I have differentiated between Piercing Lines which hit a new low, and those which did not produce a new low. - Piercing lines which did not hit a new low tended to produce weaker corrections. - I have also included 'Bullish Engulfing' candles, which are the bigger and stronger brother of 'Piercing Lines'. - One reservation regarding the candles involved in last week's Piercing Line, is that they were relatively small compared to all the other examples, which may reduce the effectiveness of the signal.

  (Click on chart below to enlarge)

The next chart is a close up of the above chart for 2010.