The foreign exchange market has not been behaving the way it should, and the EUR has been the most disobedient currency among the major pairs.
In July the German ZEW expectations index (a measure of sentiment among German investment professionals) fell to a 30-month low of -15.1, shattering all expectations. This was attributed to the sovereign-debt crisis. The EUR should have fallen, instead it climbed.
A few days later, the flash composite PMI for July plummeted from 53.3 to 50.8, barely hanging above the boom-bust line at 50. The euro rose again.
As the fundamentals aren’t offering any explanation,, we’ll turn to technical analysis. However, depending on the time frame you look at, the EUR might be set to rise or go down. And, it isn’t easy to determine which time frame to use, as the forex market is facing a set of conditions not seen in the 37 years since floating exchange rates were instroduced (and nothing has come close in the 12 years since the single currency was introduced).
In defence of a rising euro
If we examine the EUR since it bottomed out in October 2000, it is easy to support its continued rise against the USD. Since October 2000, the EUR/USD has only spent four prolonged periods below the 200-day moving average, a total of 33 months in 129, or a quarter of the time.
An uptrend can be roughly defined by a linear regression channel (three upward trending bars, the lower one at support, the upper one at resistance and the middle one halfway between the two), excluding when the currency pair broke its support in 2010 until today, and this break was only 50% of the original climb. Since 2008 the euro has been experiencing a choppy decline, though the EUR has broken out above that resistance barrier since, and has stayed above it since April 2011.
Consequently, we can argue that the market became infatuated with the single currency when it was introducted, and this infatuation overwhelmed a slew of bad economic data, poor policy decisions and political turmoil. Even in the current debt crisis and uncertainty about the currency’s future, the euro’s downtrend is much more modest than its original rise and it has retraced over 62% of the downtrend twice.
If we look at the up move from the low of June 2010 to the November 2010 and draw a line of the same slope from the current low, a case can be made for the EUR rising above 1.5000 by the end of the year.
Defending a rising euro
Fundamentalists would contend that the euro should fall, considering the sovereign-debt crisis and the fact that no one can see a solution to this for several months. And, if we look at shorter-term charts, the technicals can also back this up.
Drawing a resistance line from the May 4 high with a parallel support line puts the end-of-August range between 1.3500 and 1.43849. And, a 20-day moving average crosses above the 55-day moving average on August 10, indicating a potential rise. However the shorter-term average hasn’t risen enough to make a bullish case for the euro and has largely stayed below the 55-day average since May.
If we plot a trendline of the last big down move, (November 2009 to June 2010), and draw a second one from the high of May 2011, none could argue that the single currency could potentially fall below 1.2500 by 2012. Conditions are similar – the first drop occurred when the extent of the Greek sovereign-debt crisis became clear and the EUR fell following EFSF intervention.
In the long-term, it doesn’t pay to trade against the EUR, and it may rally again when new measures are announced to deal with the crisis. Europe also has anti-inflation and fiscal principles that long-term investors in the fx market appreciate, which means they are likely to view the sovereign debt crisis as a bump in the road.
However, there are still plenty of potential short-term selling profits to be made.
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