EUR/USD: Temporary bullish unwinding targets 1.2870.

EUR/USD is temporarily unwinding from oversold conditions, having recently broken under the major 2011 low at 1.2860 and reaching a fresh new low at 1.2666.

The major trend remains bearish and so we prefer to sell into forthcoming rallies, which are likely to be driven by temporary short covering.

Watch for near-term resistance to come in at 1.2820, then 1.2870 and 1.2920. Only a sustained break above here will offer extra gains into 1.3000 (psychological level).

Meanwhile, the bears need to push back beneath this year’s new low at 1.2666 to resume the major downtrend into 1.2588 (Aug 2010 low).

Inversely, the USD Index has extended its recovery higher to a new 12- month high (a move worth over 10% from the summer 2010 lows).

Speculative (net long) liquidity flows are strengthening once again and will continue to help resume the USD’s major bull-run from its historic oversold extremes (momentum, sentiment and liquidity).

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