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Euro at Potentially Significant Turning Point

Euro at Potentially Significant Turning Point

2014-09-19 00:24:00
David Rodriguez, Head of Business Development
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Euro at Potentially Significant Turning Point

Fundamental Forecast for Euro: Neutral

The Euro tumbled to fresh lows versus the high-flying US Dollar on a week of bad news for Europe and much better developments out of the US. But why might the Euro/Dollar exchange rate be at risk of an important bounce?

Almost all traditional fundamental signals point to further Euro weakness, and yet we see clear warning signs that such news and sentiment may be overdone. Everyone is bearish at major market bottoms and bullish at the tops, and that in itself is an important trigger which favors some sort of Euro bounce. Beyond that, however, we see technical reasons why the US Dollar rally may be overdone.

High FX market volatility continued to drive the safe-haven US currency higher across the board as the combination of a US Federal Reserve Meeting, key European Central Bank results, and the highly-anticipated Scotland independence referendum fueled major moves. Yet the week ahead promises far less foreseeable event risk, and our forward-looking DailyFX 1-Week Volatility Index has pulled back sharply. The US Dollar’s strong correlation to volatility leaves it at risk on such a slowdown.

It’s possible but unlikely that the Euro sees strong reactions to upcoming European Purchasing Managers Index (PMI) survey results, a German IFO Business Climate report, and a late-week GfK Consumer Confidence data release. Thus we’ll focus on how US Dollar traders react to calmer markets; we suspect that the EURUSD could bounce as sellers lose enthusiasm.

Recent FXCM Execution Desk numbers show that total Euro trading volume slowed even as it tumbled to fresh lows. While momentum clearly favors further losses, the slowdown acts as clear warning that markets may soon capitulate.

And thus we’re left with somewhat of a dilemma: on the one hand we believe that the Euro will remain in a downtrend, but too many signs warn of a near-term price and sentiment extreme. We advise caution on fresh EURUSD-short positions in the days ahead. – DR

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