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Is Euro really that Strong or it’s just a Bounce?

Currencies / Euro Dec 03, 2010 - 12:29 PM GMT

By: Bari_Baig


Okay, let’s be fair, past two days have been wondrous for Euro without a doubt! It is difficult to understand how quickly war wounds are forgotten when the going gets “simple” and [apparently] things are going smooth, word of focus is “apparently”.  Euro Bulls are cheering and well they have all the right to do so but should we also cheer with them? To an extent, yes as we wrote in our article [Euro, USD, Gold and Stock Index Analysis] dated Dec 1st on that “We say [Go Bulls] for 2 days” and we further went on to define the move that Euro would take in coming two days with the top side at 1.337s as the Single European currency seemed too oversold to us.

Okay, so this is where we stop cheering now. We do so because today is the 2nd day or weekend and next week starts a new tale for Euro and this is where the catch is. Optimism is good, it is very good but when optimism converts into fearlessness that is when the going gets tough.  Last two weeks were horrible for Euro but this week it was like as if someone pulled the cable out of all the negative news for Euro and thus we saw a hard bounce from 1.298s to 1.335 as we write. As the optimism is high therefore Euro Bulls are touting about higher prices. Must we repeat what we have said many many times, perhaps we will and that is “It is not Euro that is getting stronger or has a fundamental change but weakness of the green back which is pushing Euro higher”. That is precisely what is happening here.  Had Euro been the single beneficiary then only Euro would have moved smartly against the U.S Dollar. Whereas the U.S Dollar came under assault from all direction as the Dollar Index came off from 81.6s and came down hard today as the unemployment went up. Are we surprised by the unemployment percentage going up to 9.8%, not at all! It is simple, the consumer confidence is rising steadily, meaning things are getting back on track and therefore people who had stopped applying for jobs earlier would now once again try as the confidence slowly starts to revive. The street’s guesstimate was steady rate however that is proven wrong and simply put a “major kink” is now removed for U.S Dollar thereby making it much more smoother. What we find very interesting is the fact that just as U.S economic data came out, statements from Europe regarding Euro came too. Could this be a sign that this coming week Euro Zone would once again be in the midst of all the negative news? Perhaps it is as Ms. Merkel said first “All EU Members [must] embrace stability” she further went on to say “Seeking a stable Euro is worth it for Germany”. Why wouldn’t it be? Never mind.

Another interesting fact was ECB’s press conference yesterday. The initial reaction of the market was violent as Euro/USD pair slid down sharply from 1.317s to 1.306s because Mr. Trichet didn’t announce a QE “Quantitative easing” package like Mr. Bernanke announced in the last FOMC meeting but quickly the reports of three-month fully allotted liquidity program was to be continued into QE1. This was enough to push Euro up materially and it served its purpose as shorts were taken off guard and they scrambled to square their position further adding to the bid. So, Euro has cleared out its closet too like U.S Dollar has.
Now, looking at the chart below; we can clearly see that Euro’s bounce is well matched with the last week’s drop thus further supporting our argument that it was deeply oversold however, it is not oversold anymore, at best it is safely past the neutral territory therefore the real test begins now at the channel line.

This reversal move of Euro has a lot of momentum therefore it can slightly push through the channel line further convincing the Euro Bulls that all is well however, it is [Not] an intraday trend we are looking at. We’re looking at a well established trend therefore the move to break the trend itself would kill the momentum and Euro would quickly start getting heavy “overbought” and succumb to the pressure.

The risk vs. reward of going Long even at the break is far higher. On a 4-hourly chart Euro seems to be topping out already as it meets the top of the channel line. The mean of the channel alone lies quiet far down which alone if tested would suck Euro lower. The two day of fun time for Euro seems to be over. Therefore have those stops ready because to us the trend is clear and we aren’t brave enough to fight the trend. Within the confines of this channel Euro prices could move lower to just below 1.25s.

By Bari Baig

© 2010 Copyright Bari Baig - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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