What’s Next For The EUR?

By Lara Short

The fx market has not been behaving the way it should, and the euro has been the most disobedient currency among the majors.

In July the German ZEW expectations index fell to a worse-than-expected 30-month low of -15.1, attributed to the European debt crisis. The EUR should have dropped, and it rose.

A few days later, the flash composite PMI for July plummeted to 50.8 from 53.3, barely hanging above the boom-bust line at 50. The single currency went up again.

As the fundamentals aren’t offering any explanation,, we’ll instead look at technical analysis. However, depending on the time frame of your charts, the EUR might be set to go up or fall. And, it isn’t easy to determine which time frame to use, as the foreign exchange market has been confronted by a set of conditions not seen in the 37 years since floating exchange rates were instroduced (or, for that matter, since the EUR was introduced 12 years ago).

The case for a rising euro

If we examine the single currency since it bottomed out in October 2000, it is easy to support its continued rise against the US dollar. Since October 2000, the EUR/USD has only dropped below the 200-day moving average four times, 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 forex pair broke its support in 2010 until today, and this has only been slightly over 50% of the primary up move. Since 2008 the euro has been experiencing a choppy decline, though the euro has broken out above that resistance barrier since, and has stayed above it since April this year.

So we can infer that the market became infatuated with the euro when it was introducted, and this infatuation overwhelmed bad economic data, poor policy decisions and political turmoil. Even in the current debt crisis and uncertainty about the currency’s future, the EUR’s fall is much milder 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 euro rising above 1.5000 by the end of the year.

The case for a rising EUR

Fundamentalists would contend that the euro should fall, considering the current debt crisis and the fact that there are no real solutions expected for several months. And, examining shorter-term charts, the technicals can also back this up.

A strong resistance line can be drawn from the high of May 4, 2011, and a parallel support line brings the end-of-August range to 1.3500 to 1.43849. The shorter-term 20-day moving average crossed above the longer 55-day moving average on August 10, however it hasn’t risen enough to make a bullish case for the EUR and has largely stayed below the 55-day average since May.

If we plot a trendline of the last big down move, from late November 2009 to June 2010, and plot a second one at the high of May 2011, none could argue that the EUR could potentially plummet below 1.2500 by the end of 2011. The current conditions are similar to those before the last downturn – the first plunge happened when the extent of the Greek debt crisis became clear and the single currency depreciated following the intervention of the EFSF.

To conclude

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 currency market appreciate, which means they are likely to view the sovereign debt crisis as a bump in the road.

However, there are plenty of potential short-term short-selling profits to be made.

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