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Published On: Wed, Aug 27th, 2014

The EUR/USD enters a correction territory as profit taking kicks in

The euro recovered slightly from almost one-year low against the US dollar recorded in early Asian trade as the pair reached a large option barrier at the 1.3150 support; the common currency gains are seen as short-term and the upside is limited.

The EUR/USD recovered from almost one-year low as the pair reached a large option barrier at 1.3150; gains are seen as short-term and the upside is limited.

Wednesday was a quiet day on the forex front, with few economic data and news releases. Traded volumes were light and no rapid movements could be witnessed. The dollar experienced some weakness on profit taking in European and US trading sessions.

Before that the EUR/USD had slid to almost one-year low, touching 1.3151. The pair found support there, since a big option barrier concentrated on the 1.3150 level limited the downside. The common currency started its bounce as some short covering commenced at this point.

As of 6:29 pm GMT, the pair is trading at 1.3196, after hitting a session high of 1.3209. It is expected that profit taking will extend the correction, though the EUR/USD is not expected to make a serious jump from here.

The much better economic state of America compared to Europe, the growing interest rate differential in favor of US Treasuries and the diverging monetary policy paths of the Fed and the ECB are some of the key drivers of the sustained dollar rally against the euro. The latter has lost almost 3 figures against its American counterpart for the month of August alone. Hence, the EUR/USD advance today should be viewed as a relief rally based on technical rather than fundamental factors. The shorts squeeze might take the pair higher in the coming days, but all that should be viewed as a mere correction with the mid-term picture markedly bearish for the euro. Analysts believe that a test of the 1.30 psychological support in the near term is a sure bet.

 

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