Euro Rally Likely to Reverse

By: Richard_Cox

As we move into the end of this year, we have seen some surprising moves in the currency markets that have likely taken many traders by surprise.  Perhaps the best example here is the shorter-term rally in the EUR/USD, which has quickly risen to near important psychological levels at 1.10.  This commonly traded pair has spent most of its recent activity roughly 5 big-figures below this area, so the it is difficult to argue against the fact that these moves have been substantial. 

But when we look at these moves, there is now a serious disconnect between the fundamental backdrop and the technical price activity.  If anything, this should raise some serious red flags for forex traders and it is more than likely that we have see all we are likely to see in this latest rally in the EUR/USD.

Chart Outlook:  EUR/USD

Chart Source:  FiboGroup

The first factor to consider is the idea that the European Central Bank has been quoted as offering support for new quantitative easing programs for the Eurozone.  This might be surprising to some, as the region’s sovereign debt crisis has largely receded from the headlines.  But the reality is that most of these problems still exist and the ECB is currently looking for ways to add stimulus to the economy.

If this turns out to be the case, it would be a highly bearish event for the Euro and it can be argued that the primary beneficiary in this type of scenario would be the US Dollar.  This means that we are headed for much lower prices in the EUR/USD as we start trading in 2016. 

Going forward, traders will need to continue monitoring the pair on any approach of 1.10 to see how the rest of the markets react.  More than likely, we will see failures in this area but the overall bias starts to reverse if we do see an upside break of 1.10.  So this is the critical area to watch.  The broader expectations is still for failures here, and if this does occur the long term projection is for the EUR/USD to reach parity for the first time since the inception of the Euro itself.  The ECB will have a lot to say with whether or not these expectations take place, and any further indications that the Eurozone is in need of additional monetary stimulus will more than likely lead to broad weakness in the Euro against several major currencies. 

By Richard Cox

© 2015 Richard Cox - All Rights Reserved

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