EUR Forecasts

ByWan Shao

The foreign exchange market has not been behaving the way it should, and the euro has been the most disobedient currency of the majors.

In July the German ZEW expectations index (a measure of sentiment among German investment professionals) fell to a worse-than-expected 30-month low of -15.1, attributed to the European sovereign-debt crisis. The euro should have fallen, and it rose.

Days later, the flash composite PMI for July plummeted to 50.8 from 53.3, barely remaining above the boom-bust line at 50. The EUR climbed again.

So, with fundamentals not adding up, we'll instead look at 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 fx market is facing conditions never seen in the 37 years since the 1974 introduction of floating currency rates (and nothing has come close in the 12 years since the EUR was introduced).

The case for a rising euro

If we look at the single currency 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 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 break was only 50% of the primary up move. Since 2008 the single currency has been experiencing a choppy decline, though the single currency has broken out above that resistance barrier since, and has remained above it since April this year.

So we can deduce that the market became infatuated with the EUR after its introduction, and this infatuation overcame 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 climb 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

Fundamentals argue that the single currency should fall, given the current debt crisis and the fact that there are no real solutions expected for several months. And, looking 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. The shorter-term 20-day moving average crossed above the longer 55-day moving average on August 10, however the shorter-term average hasn't risen enough to make a bullish case for the EUR and has largely stayed below the 55-day moving average since May.

And, if we plot a trendline of the last big drop, from late November 2009 to June 2010, and draw a second one at the high of May 2011, this indicates that the euro could potentially fall below 1.2500 by 2012. Conditions are similar - the first fall happened after the extent of the Greek sovereign-debt crisis became clear to the markets and the EUR fell following the intervention of the European Financial Stability Fund.

Closing thoughts

History has shown that it doesn't pay to trade against the single currency in the long term, and chances are that it may rally again when new measures are announced to deal with the crisis. Europe also has fiscal principles and anti-inflation 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.

That being said, there are still plenty of potential short-term shorting profits to be made.

If you have a view on how the euro will be impacted and believe short selling is the way to go visit my favourite CFD broker. They offer global stock indices, forex pairs, commodities, and over 7,000 global shares.

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