The EUR/USD had a sharp sell-off during the London session Wednesday morning as it fell from a HI of 1.2733 to a low of 2.2660 in a little over an hour at the London open.  The euro has been under extreme pressure this week as several news reports have come out concerning the depth of Greece's sovereign debt.  Many experts are fully expecting a restructuring of Greek debt at some point in the somewhat near future, and unfortunately no one knows for sure how this will affect the EuroZone as a whole.

If Greece does have to restructure its debt, there will most likely be a run on Greek banks and they will take huge hits.  The hope is that the risk can be contained to Greece, but no one knows for sure how severe the ripple effect will be throughout the EuroZone and even global financial system.  These renewed concerns have put pressure on the euro this week and the EUR/USD has fallen from a HI of 1.2910 to a low of 1.2660 this week.  The euro has definitely formed a clear zone of resistance in the 1.2910 area that has now proved to be very resilient.  The technical resistance at 1.2910 combined with the very poor fundamental picture surrounding Greece should make it quite difficult for the euro to break through the 1.2910 area in the near-term.  However, any break above 1.2910 would be a strong sign that investors have discounted the concerns surrounding Greece, and that should open up higher levels for the EUR/USD.
 Note: Past performance is not indicative of future results.
In the chart above, you can see the clear resistance in the 1.2910 area.  On the downside, the euro now has a diagonal line of support that it is currently respecting on the higher timeframes.  The euro has been stuck in this large range for about 1 month.  Thus, when price does finally break out, the break out will most likely be strong and large.  A break to the downside will have to break below the immediate support which is the diagonal trendline and the low down at 1.2600.

The price action on the EUR/USD has been quite strong during London and New York trading on Wednesday.  First, the euro sold-off sharply during early London trading; then when the New York session got rolling, traders pushed the euro all the way back up to the HI of London and actually moved above that level to post a fresh daily HI; thus, buyers are very much in control of the intraday action on the euro at the moment, but there is heavy overhead resistance between 1.2780-1.2800.

Note: Past performance is not indicative of future results.

Irish Problems Adding Fuel To The Greek Fire

Along with renewed focus on Greece, investors are also paying close attention to Ireland.  Ireland was in the group of nations that caused the euro meltdown this spring, and they are back in the headlines again as yield spreads are hitting record highs.  We have been saying for several months in these daily reports that one of the first signs of a possible serious fall in the euro will be when yield spreads begin to widen significantly.  That is now happening.  The yield spread measures the difference between interest rates in struggling EuroZone countries such as Greece and Ireland with that of the EuroZone economic leader, Germany.  When that yield spread widens significantly, that is a sign that financing costs are rising for struggling countries and that makes a dreary economic picture even bleaker.  This widening of yield spreads has caught the attention of global investors this week, and if the problem intensifies, the euro will most likely remain under pressure.

U.K.

News out of the U.K. was very positive Wednesday morning.  Most analysts have expected the U.K. economy to grow steadily, albeit at a very slow pace, during the second half of 2010.  The austerity measures that Prime Minister Cameron's administration are passing will most likely keep growth at very low levels.  News out Wednesday morning served to support the notion that the U.K. economy is moving forward at a steady pace.

Halifax HPI came out very strong at 0.2% versus the expected figure of -0.3% and Manufacturing Production came out as expected at 0.3%.  These positive numbers helped to push the pound higher during trading on Wednesday. 
 Note: Past performance is not indicative of future results.
The pound is currently sitting on intraday support at 1.5490 during the afternoon New York trading session.  The pound has done well holding its bullish sentiment today, and the positive news only helped to convince market participants to push the pound higher.  The 1.5500 area is major psychological resistance, and the pound was not able to keep trading above this level today.  However, it is acting well at the moment as price hovers above the support at 1.5490.

U.K. Rate Announcement

The U.K. will be announcing interest rates tomorrow at 7:00 am.  The chance of the interest rate being raised or lowered is virtually 0%, but the official rate statement should cause a bit of market movement.  It will most likely not be a huge market mover since the market is mostly aware of Governor King's stance on monetary policy, but if there are any surprises that are overly hawkish or dovish, it could cause the pound to move strongly.

Market participants may be unwilling to commit to higher prices on the pound before tomorrow's interest rate announcement.  Most likely, the market will want a clear reason to justify pushing the pound much higher above 1.5500.  Currently, there is so much mixture in the global economy that it is difficult for investors to really formulate a clear game plan concerning market direction.  The most likely scenario is that we continue to move in these ranging markets until either the systemic risks subside significantly, or deteriorate to serious levels.

The safest thing to do in a range bound market is to trade conservatively with tight risk parameters while waiting for the market to show its hand concerning where it is headed.  Currently, there does not seem to be a clear hand on the table.