Fundamental Update: Has the Euro fallen far enough?

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Nathan James
5 years ago
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They were worried the market was oversold, that a lot of the bad news was priced in already and if there was any good news the market might stage a powerful relief rally.

1 Fundamental Update: Has the Euro fallen far enough? Kathleen Brooks, Research Director FOREX.COM May 29, 2012 I overheard an interesting conversation the other day; someone was saying they were too frightened to go short the euro at this level (approx ). They were worried the market was oversold, that a lot of the bad news was priced in already and if there was any good news the market might stage a powerful relief rally. This brings up some interesting points about trading the euro. After remaining fairly range bound for the first few months of the year, has the euro s reputation of resilience stuck and could it limit the downside? So what could help the euro to recover from here? 1, CFTC speculative positioning data is at an extreme level. Shorts in EURUSD are at their highest level since the euro began. It is quite possible that people who want to sell the euro have already done so. 2, Commodities led the markets lower and started their sell off in March, before EURUSD broke below Oil, metals and gold have performed well in recent days, which could lift other asset markets like the euro. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.

2 3, Banks in the region continue to de-lever and close overseas businesses. Although it is hard to define the true currency impact of banks repatriation flows, it is likely to have a mild upward impact on the euro. 4, Some expect the EU authorities and the ECB to react to the crisis when volatility spikes. Thus, the rally in the euro could be a pre-emptive move by the markets who expect official action if the going gets tough. 5, There are also a couple of technical reasons for a bounce in EURUSD in the short-term: whole numbers tend to have strong significance in the currency markets, hence 1.25 has, so far, held as strong support. Added to that there may be the start of an inverse head and shoulders pattern forming on the short/term EURUSD chart. If can continue to hold as support then we could bounce back to (a key resistance level and prior support from January). Above here opens the way for a move back towards What could weigh on the euro? 1, The sovereign debt crisis remains far from over. No one knows what a Greek exit looks like, added to that no one knows whether or not the EU has the funds to bail out a country as large as Spain. As long as these uncertainties exist then it s hard to see how the euro can t remain sensitive to downward pressure caused by the sovereign debt crisis. 2, China and Japan are slowing, which may erode their FX reserves. In the past FX reserve diversification has been a major pillar of support to the euro, however going forward this sort of support may no longer exist. 3, Although CFTC data is important, a lot of people don t know what it is and it is not reported widely in the press. Thus, just because this indicator suggests the euro has been sold enough already it may not put investors off shorting the single currency. 4, Pre-empting a move by the EU authorities or the ECB is a dangerous game. The EU authorities seem resistant to boosting bailout funds, and Germany continues to shy away from the idea of Eurobonds. Likewise, the ECB is one of the most hawkish of the major central banks and haven t done anything so far to help Spain although its bond yields are getting closer to the critical 7% level. 5, Typically nothing goes down in a straight line. Back in 2010 when EURUSD fell below 1.20, there were pullbacks and the same could happen this time. In fact, if we do get a pullback to around or even this could be used to sell into especially as we approach the Greek election on 17th June, which may cause volatility to rise. 2 / 5

3 In conclusion, the euro is in a difficult spot. Although the technical signals may point to a pullback, a stray headline could be taken the wrong way and cause market jitters at any time. The problem is the markets are waiting for certainty and when they don t have it a sell-off in risk is always possible. We expect EURUSD to falter at and it may re-test 1.25 before breaking through it and meandering down to It could fall much more sharply if there is negative news out of Spain or Greece. Thus, EURUSD has gone back to being a break-out trade. A break of 1.25 opens the way to further losses, in our view. If we do get a recovery in risk then we could see sellers coming back into the market at approx EURUSD: weekly chart -- the MACD suggests that there is further momentum to the downside. 3 / 5

4 EURUSD: hourly there is the potential for a pullback, and the s/t chart could be forming an inverse head and shoulders. If we manage to hold support at , we may re-test the prior highs. 4 / 5

5 Gold vs. euro For all the gold bugs, another way to trade the yellow metal is to trade it priced in the single currency. Gold/ euro has recovered since mid-may as the euro sold off sharply while gold joined other commodities and started to recover. It is approaching a key resistance zone between EU 1,255-70, and if gold can continue to outpace the euro then we could see a move back towards EU 1,300. The daily MACD and RSI suggest upward momentum remains for this cross. 5 / 5

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