The recent sell off in the EUR/USD has put all market traders on edge and sparked speculations that the Federal Reserve is going to purchase Euro-dollar securities as a means of controlling inflation. When the central bank announces the plans, it seems they have already been very successful, but can the plan last?
The EUR/USD trade has already come under fire from Euro investors who fear that the plan will be too costly for the euro. If the dollar continues to rise, it could force the Euro down even further. There are other possible outcomes, but investors should remember that we have seen a great deal of volatility in this trade over the past month.
If the plan does gain momentum, it will most likely be followed by a new wave of selling in the financial markets. This will drive down the EUR/USD to even more fundamental lows, only to bounce back up to fair value when market conditions are favorable.
The Federal Reserve’s recently released letter indicated that it will start buying bonds with an implicit promise to continue to do so. The Fed is also expected to continue the policy on a “going forward” basis. Market participants will then be looking for confirmation from the Fed, or to see where the market may be headed before they make any trades.
Why hasn’t the EUR/USD rebound come sooner, if the Fed is investing in dollar-denominated assets? Perhaps the ECB needs to catch up with the U.S. Dollar to regain some of its market share.
The impact on the EUR/USD of the EU/USD to a certain extent depends on how aggressive the EU governments are in attempting to save their currency and move up against the USD. If they succeed in doing so, investors will likely lose some of their focus on the EUR/USD and shift to the EMD.
Investors need to understand that the world’s economies are not stable and volatile, and it will take time for the European economies to recover. If the ECB commits to standing by the Euro for the long term, it will help the currency retain some much needed strength against the dollar.
For now, the Euro remains well below the levels that would be required to fully support the trend reversal. For those traders who have been hedging with EMDs and other US Treasuries, it may be time to adjust that strategy and go short again. It may not take long for the markets to correct on the EUR/USD.
It would be very smart for investors to prepare themselves for a “shift” in the EUR/USD when the fundamentals turn against it. After all, don’t all charts and technical indicators show resistance around an uptrend? This time will be no different.
With technical indicators showing short term support, it is likely that the EUR/USD will find support at $1.15, which is well above the current level of around $1.10. After a change in trend, the market will probably return to its basic trend lines, so any resistance levels will probably hold for quite some time.
Be prepared for the very strong possibility of a further “extreme drawdown” as the market sets up a new range pattern. The EUR/USD will probably rebound slowly and it is far too early to predict the exact timing or pattern of that rebound.
Read the report, which explains how the markets behaved and the conditions under which this trend may play out. Don’t get caught up in any of the technical signs and get involved in another successful trading career!