Euro - Victim Of Its Own Success?

Fundamentals

Euro currency futures have struggled to get back to highs made in mid-September, as traders are concerned that the currency may have appreciated too quickly. The move may also be attributed to short-covering of US Dollar positions by FX traders. The pullback is not, however, likely related to market fundamentals, which suggest that the pan-European currency may continue to strengthen by default because of the huge amount of American consumer and government debt. The lack of consumer spending continues to be a major concern for the Federal Reserve and will likely force the central bank to keep interest rates low for the foreseeable future.

The European Central Bank is not expected to raise interest rates today, but the official policy statement may give clues as to when the central bank may raise rates in the future. Recent statements by policymakers have focused on downside risk and have downplayed “green shoots.” Like the US, European economic data has shown growth prospects, but data remains below what would be seen as growth. The EU has warned 9 member states that have exceeded their budget deficit target of 3% by a wide margin. So far, 20 if the 27 nations that comprise the EU have exceeded the 3 % target. This is a sign that the union may become more rigid in regard to the amount of government debt issued by member nations, thus reducing supply and giving the currency an advantage over the greenback in this regard.

Trading Ideas

The fundamental outlook remains positive for the Euro over the long-term. In the short-term, however, forex traders may focus on their inability to push the Dollar even lower, which could trigger further short-covering in the US currency. The technical outlook in the near-term may favor the bear camp. Therefore, some traders may wish to stay on the sidelines and see how the currency behaves in the near-term. Or, some traders may wish to be short the futures contract on a solid close below the 1.45 level, with a downside target of 1.42 and a protective stop of 1.48. The trade has a roughly 1:1 risk/reward ration, whereupon the profit and risk targets are around $3,750.

Technicals

The December Euro chart shows prices struggling to maintain the upward momentum. Prices did come down to test the 1.45 level and were able to hold the initial test. Going forward, the 1.45 mark may be seen as a pivotal level for the currency, as a violation of this rate would confirm a double-top on the daily chart. The recent closes above the 20-day moving average suggest that a near-term low may be in place. It is interesting to note that the 20-day momentum indicator is showing bearish divergence from both price and RSI, suggesting the Euro may find itself under pressure in upcoming sessions.

Subscribe by RSS Subscribe by Email