The U.S. Dollar has staged quite a rally versus the Euro and Pound since last week.  Concerns regarding the global economic recovery have caused a sell-off in risk assets and the U.S. Dollar has benefited accordingly.  In this report, we will break down both the EUR/USD and GBP/USD, analyze current price levels, and see where both of these pairs may be headed in the near-term.

EURO

 Note: Past performance is not indicative of future results.
Very interesting price action is developing on the Euro.  First of all, you can see in the chart above that the sell-off from the 1.3300 level was very sharp.  The move down from 1.3300 to 1.2750 was much more vertical and volatile than the move up.  The euro basically took 2 weeks of price action in 2 days.  This type of selling momentum is generally more indicative of a new trend rather than a retracement.  Also, as we have hit the 1.2700 area, price has not bounced higher in any aggressive manner.  In fact, as you can see on the chart above, price is currently consolidating down at the lows of the fall from 1.3300.  This is typical continuation behavior, meaning that we could very well see another drop in this euro to the next level of support below the 1.2700 area.

The last daily candle you see on the chart above, which is Wednesday's candle, is showing a pin bar, with a long wick to the upside and a bearish close.  This type of candle is generally a very bearish signal.  The psychology behind the candle is that price moved higher during the trading session yesterday, but higher levels were strongly rejected by sellers, and price was pushed all the way back down below the day's open.  This is very bearish activity.

If price does get momentum to the downside, the base at 1.2732 will, of course, be the first area of major support.  We now have a strong double bottom at 1.2732, so if that area is broken to the downside, we could see a significant run below the level.  The next area of strong support should be in the 1.2600 area and beyond that the 1.2430 area.

Pound

The pound has had a similar journey to the euro over the last 2 weeks, but it has not dropped quite as sharply as the euro.  The euro drop was very dramatic and punctuated while the pound drop has been a bit slower.
 Note: Past performance is not indicative of future results.
In the pic above you can see that the initial drop in the pound was pretty sharp, but since then it has dropped in a pretty choppy manner.  This is due to several reasons.  First of all, investors are still unsure of what direction the global economy is headed.  Thus, there isn't a huge impetus to sell-off sharply, yet.  However, the degree of sell-off we have seen in the last 2 weeks is making it clear that investors are very hesitant to push prices higher.

Higher levels in the pound in the near term should be difficult because there is simply not much fundamental backing and justification for investors to pay higher prices to increase pound holding.  Asset prices are all about supply and demand, and there simply is not demand for the pound above 1.6000.  The most likely scenario is that the pound will move into a bit of consolidation through the near-term as investors weight the current global economic climate and decide on a game plan for the fall trading season.

The pound does have Retail Sales figure coming out Thursday morning during the London trading session.  The number is expected to come out at 0.4%, which is a smaller increase than last month's 0.7%.  If the figure disappoints to the downside, we could see the pound blow through support down at the 1.5500 level.  That 1.5500 level is very strong support and it will take quite a bit of selling momentum to get below it; however, if price does break through to the downside and show commitment below the 5500 level, we could see much lower prices in the pound as well.

Further pound support should be seen at the 1.5330 area, which is the 38% retracement of the overall move up during June and July.  Beyond that, very strong support is at the 1.5120 level.  The price action of the daily chart pictured above is quite bearish on the pound.  The retracement during the last two weeks to the lows of 1.5500 has not really attracted strong buying interest.  If this move down over the last 2 weeks was just a retracement of an overall bullish move on the pound, then we should have seen more buying interest to push it back up, but we are not really seeing that yet.  Buyers have proven to be very hesitant to come into the market with any sort of conviction.  Price is currently consolidating down at the lows of the move, which, of course, generally signals a continuation move to the downside.  Similar to the euro, we may see further choppy markets through this week before market participants really make up their minds concerning which direction this pound is going to head in the mid-term.

If any economic developments in China, the EuroZone, or U.S. point to more serious threats of global economic well-being, the Dollar could get strength to pull this pound down further.  The Bank of England minutes that came out Wednesday morning were actually a bit more bullish than expected and the pound initially rallied during the London session before dropping quite consistently throughout the entire New York trading session.

This inability for the pound to keep at higher levels on positive news out of the U.K. is not a good sign for pound strength.  This is actually a pretty strong sign of pound weakness at the moment.  As mentioned, if these Retail Sales figures come out weak on Thursday morning, it could be the impetus needed for this pound to really fall sharply in the near term and make a clean break below 5500.