New Leg Down For The Euro Currency
By Alan Bush, Archer Financial Services
After the euro registered a 16-month low against the U.S. dollar on January 13 at 1.2627, prices rallied to the 1.3325 mark on February 9. Formidable chart resistance was taken out above the series of highs and lows that came in at the 1.3224 to the 1.3237 range. Above this range is probably where the last of the stubborn shorts finally covered their positions. More recently, the technical aspects of this chart are starting to break down again. A major uptrend line on the daily chart was penetrated on the downside on Tuesday.
March 2012 Euro Currency Futures – Daily
Chart provided by APEX
Since the lows were made in the middle of January, there has been some positive news that helped the euro to recover.
- The euro temporarily firmed after a report showed German investor confidence increased in February. The ZEW Center for European Economic Research said its index of investor and analyst expectations advanced to 5.4 from -21.6 in the previous month.
- The euro was supported after Greek Prime Minister Papademos won approval from parliament to establish new austerity measures that are essential to receive additional bailout funds.
- German Finance Minister Wolfgang Schaeuble said Europe is more prepared now for a Greek default than they were two years ago.
- The European Central Bank left their benchmark interest rate unchanged at a record low of 1%, which is supportive from an interest rate differential point of view.
- The euro was supported by news that fourth quarter gross domestic product in the euro zone contracted less than anticipated, shrinking .3%, which compares to the median estimate of a .4% contraction.
Much of the recent news has been mostly bearish.
- Even though the fourth quarter gross domestic product in the euro zone contracted less than expected, it was the first contraction in the euro zone economy since the second quarter of 2009. This puts the euro zone economy dangerously close to recession. Remember the textbook definition of recession is two consecutive quarters of negative growth for gross domestic product.
- The euro came under pressure on news that Moody's Investors Service cut the credit ratings of six European countries.
- The gross domestic product of Greece declined 7% from a year ago in the fourth quarter, after a 5% contraction in the third quarter.
- Italy's gross domestic product declined more in the fourth quarter than in the third quarter.
- Greek unions continue to strike to protest proposed new austerity measures. Political pressure on the Greek government was ramped up when German Finance Minister Wolfgang Schaeuble said Greece is currently not reaching their debt cutting targets. A spokesman for the European Union said, "no disbursement without implementation."
- The euro zone finance ministers meeting, that was scheduled for Wednesday in Brussels, was cancelled in an effort to prod Greece into providing a more solid commitment to follow through on their promises of additional austerity measures. They held a teleconference instead.
For the first time since the January lows were registered, this week we are starting to see a pattern of the euro currency underperforming the news. The euro did not respond well to news that China promised to help resolve the financial crisis in the euro zone.
The promise to help from China should not be taken too seriously. In the last year there have been similar offers from China to help, but were basically rejected when financially troubled euro area nations learned that financial assistance from China was linked to the sale of state owned assets to China at bargains levels.
CONCLUSION
The longer-term underlying fundamentals remain bearish for the currency of the euro zone, even though some of the recent news from the euro zone has suggested financial conditions may have gotten a little better. It appears that the strains on the financial system in the euro area are becoming more severe. Our analysis indicates the euro zone economy will enter into recession and the value of the euro will decline against the U.S. dollar in the long term.
As a result, we anticipate there will be increased motivation for market participants to seek the relative safety of the U.S. dollar, by moving funds out of the euro currency and into greenback.
The main trend for the euro currency is lower, with the next downside psychological chart objective coming in at 1.2500 to be followed by a test of the 1.2000 area.
If you would like more information on these contracts, please contact Alan at 312.242.7911 or via email at alan.bush@archerfinancials.com.
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