The euro after Cyprus’s bail-out – watch and wait

It's little wonder the euro fell following the news of the shambolic bail-out deal for Cyprus. But is this the start of a prolonged decline, asks John C Burford, or just a temporary blip?

Over the weekend, savers in Cyprus got a grim surprise. The government agreed to levy everyone's bank deposits in order to obtain a bail-out from the IMF and ECB.

A parliamentary vote on the levy has now been postponed until tomorrow.

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Predictably, the EUR/USD opened on the weak side this morning in Asia. But will the shock from Cyprus lead to even weaker values directly ahead?

I last covered the euro on 11 March, when it was trying to stabilise around the 1.30 level.Below isthe 15-minute chart then.

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My tramlines are being observed with a small bounce to the then current market.

At the time I wrote: "As I see it this morning, there appears to be little gas in the tank for another rally back above the 1.31 area and the path of least resistance still appears to be down."

13-3-11-MWT-3

(Click on the chart for a larger version)

Since then, my forecast has turned out correct, with last week's rally being turned back at the 1.31 level at my upper tramline.

That was a possible short trade entry.

So, what have recent developments done to this chart. Here it is on the hourly scale:

13-3-18-MWT-2

(Click on the chart for a larger version)

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The opening today took the market below the lower tramline, but is this a genuine break? After all, the market has come back into the trading channel as I write.

The rule I use in these situations is simple: watch and wait.

The huge gap in the chart from the weak opening today has done a lot of damage. But as a rule, gaps tend to get filled, or at least, a partial attempt is made to fill them.

This means, unless you have a position, the prudent course is to wait for further developments.

The Cyprus news has not radically altered my belief that the US dollar, which has been strong of late, is due a pause with the euro tending to gain in the short to medium term.

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What evidence do I have for this?

Here is the daily chart. It shows the market has met the Fibonacci 50% retrace level:

13-3-18-MWT-3

(Click on the chart for a larger version)

Also, the 1.29 area lies within the chart support zone from last year.

And my lower tramline on the hourly chart has not yet been convincingly broken.

But if that does occur, the next support lies at the Fibonacci 62% retrace in the 1.2750 area.

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The alternative is that my upper tramline will be taken out leading to a most likely assault on the 1.33 level.

But for now, we are in no man's land between the tramlines.

If you're a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading Advanced tramline trading An introduction to Elliott wave theory Advanced trading with Elliott waves Trading with Fibonacci levels Trading with 'momentum' Putting it all together

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here.

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