EURO – Where to Sell?
While EUR/USD rebounded just a few pips shy of 1.05 the last week of December the New Year starts with investors still wondering if the currency pair will hit parity. In a broader context, we are actually pretty close to that level and a move down to that rate hinges less on European developments than U.S. ones. If the U.S. dollar continues to strengthen, the euro will continue to weaken. The Eurozone has its own troubles but as weak as the euro may be, the slide in the currency is changing the outlook for inflation and growth. In the recent ECB economic bulletin, the central bank said they see inflation picking up strongly at the turn of the year, a view that the Bank of England shares. We’ll likely see this view repeated in the ECB’s account of their last monetary policy meeting, which is due for release next week. Data should also be relatively healthy with sentiment up and job growth growing, albeit at a slightly slower pace. The ECB’s easy monetary policy is paying dividends but Europe’s problems extend beyond day to day business activity. The greatest risk for the Eurozone and the euro next year are politics, terrorism, elections and a banking crisis in Italy. Many of these events are difficult to handicap but each of these scenarios could have a dramatic impact on the currency overshadowing positive improvements in the economy. Looking ahead we hope to sell rallies in the EUR/USD between 1.06 and 1.07 targeting a move to 1.01 or lower.
Technically now that the 1.05 level has been broken the next “main area” to sell EUR/USD will be at the 50-day SMA below 1.07. EUR/USD may not get that high so anywhere on the 1.06 handle may be a good place to scale in shorts. The focus however remains on 1.05. If the currency pair falls back below 1.0500, we should see the pair drop back to its December low which coincides with the 1997 low near 1.0350. If EUR/USD breaks above 1.07, then the next stop will be 1.09.