Another interesting week for us as euro bears, with the single currency ending at a two month high against the US dollar, as well as posting strong rebounds against many of the currency cross pairs. Last week’s performance was of course against the backdrop of the Ecofin meeting, which spectacularly failed to deliver any longer term solution to the debt problems and as such postponed any firm proposals until late March when the next EU council meeting is scheduled between the 24th and 25th March.
Whilst there was some relaxation in the German position, in that they are prepared to consider further assistance to weaker member states, their broad views remain virtually unchanged, insisting that other EU states will also need to match any additional help with that given by Germany. This of course then raises the issue of how these indebted countries, such as Spain, Italy and Belgium will be able to cope, struggling with their own economic problems whilst at the same time being asked for additional funds, and as such begs the question as to the validity of current bullish sentiment towards the euro.
From a fundamental perspective last week, the German data for both the ZEW and IFO suggested a strong economic picture, but then this hardly comes as any surprise, since Germany has been the leading economy of Europe for some time, and by some margin, and to be blunt, without it, the euro would have sunk without trace some time ago. However, core strength is not really the issue at present, and it is how the other members will muddle through that is the central issue here, and despite the strong technical picture, with the euro dollar breaking and holding above the 1.3500 region, we believe that this is a fake out rally, and that fundamental pressures will take hold in due course, probably within the next 2-3 weeks, and as such we can expect to see the euro dollar back below the 1.3000 level in the short term, with a further fall during February, to test the 1.2500 – 1.2700 level by the end of the month. From there however, expect to see the euro dollar climb dramatically for the remainder of the year, as we expect the see the eur/usd trading at around 1.4750 – 1.5000 by the end of the year as inflation begins to bite and interest rates rise accordingly.
As such the current bullish breakout should be viewed as an opportunity to add further short positions in preparation for the pullback and reversal lower, particularly once we see a shooting star candle on the daily chart. Once in the 1.2500 to 1.2700 area, these positions should then be closed and longer term bullish trades placed on the relevant signals. One of the best ways to play this trade is to look at a 10 month put option on the ISE.
Why not join me in one of my FREE live training rooms – I look forward to seeing you there – Anna