When we look at the price activity seen in recent weeks, it certainly looks like the tide is turning for the Euro and that we are ready to see lower market valuations into next quarter. From a chart perspective, we have already seen a break in critical support in the 1.3630 region and was a highly bearish move that has built in momentum and sent prices much lower as we head into the middle of June.
On the other side of the coin (looking at the fundamentals), there are plenty of factors that support these moves. The rising consumer debt levels that now plague the Eurozone have created a bleak outlook, and this underscores the importance for each American consumers to obtain their own credit report as a means for additional protection. But while the US Dollar has been on the receiving end of most of this year’s selling pressure, there have been many developing reasons for why forex traders should have expected bearish moved in the Euro shared currency.
For stock traders, it will be important to see how the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP) and SPDR S&P 500 Trust ETF (NYSE:SPY) behave in response. But there is likely to be some carry over into precious metals, as well. So watch for increased volatility in the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Silver Trust ETF (NYSE:SLV).
Sovereign Debt Crisis
Most important is the fact that there is little reason to believe that the Eurozone has officially recovered from its sovereign debt crisis from just a few years back. If you remember, these negative economic scenarios tyrannized financial news headlines for an extended period of time and then quickly disappeared. But when we look at the underlying economic data, this lack of attention makes little sense. What makes even less sense is the fact that the currency has been rallying against the Dollar for most of this year even though the Federal Reserve has made it abundantly clear that its QE stimulus programs will be completed before the end of this year.
Since this essentially means that fewer Dollars will be running through the global economic system (and no real change in the underlying demand for the US currency), the implications here should be bullish for the currency. But the broader cross-currency correlations have snowballed and the resulting economic stories for most of the year have involved higher market valuations in the EUR/USD and GBP/USD. These latest moves signal that a change is afoot and that the market is now ready to correct back toward its fundamentals. This means that forex traders will need to acknowledge the 11.3% unemployment that is seen in the region as a whole along with the fact that annual growth numbers as measured by GDP clearly favor the US economy on a relative basis.
Chart Perspective: EUR/USD
But while most of the market has ignored the fundamentals and traded almost entirely using momentum based strategies, the break of 1.3630 has confirmed that a new environment is in place and that the Euro itself is likely to encounter prolonged weakness. “Critical support for the EUR/USD was originally found at 1.3630, but since this area was invalidated we are not likely to encounter additional support until we reach 1.3480,” according to Sam Kikla, markets analyst at BestCredit. “1.35 is likely to give some psychological support in the interim but the overall bias is clearly bearish given the latest price trajectory.”