Eur/USD Forex Pair Showing Early Signs of Weakness and Return to Rationality

The Euro has bested the U.S. Dollar for five consecutive weeks as the EUR/USD forex pair has moved from its low of 1.26440 on Sept-9-2010 to as high as 1.41581 on Oct-15-2010. A gain of almost 12% for a major currency in such a relatively short period of time is nothing short of uncommon.

Central bankers appear to have coordinated a successful counter-offensive against any speculators who would short the Euro (based upon its failure to craft credible solutions to its sovereign debt and banking industry capital requirement inadequacies). Even General Patton himself would admire such precise execution.

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Daily chart for EUR/USD forex pair as of 10-18-2010; click to enlarge

Alas, everything manufactured (or man-made) has a beginning and an end and vice versa. So goes the cycle of life and the markets. In Monday’s trading, the Euro failed to re-establish support at the lower channel of its recent uptrend. Should this technical condition persist much longer, downward momentum becomes a self-fulfilling prophecy and increases the odds for bearish correction.

Besides this, when one really thinks about it the strong move in the Euro vs. the dollar, it should seem a bit strange. Consider the fact that both economies are experiencing slow growth and almost equally suffering from high unemployment rates.

What distinguishes one from the other is that Europe’s unemployment problems  are more structural whereas the U.S. employment situation seems to be plagued more by a collapse in demand. The latter one, while difficult to resolve, actually recovers much quicker when a solution is found.

At some point, this rationale might re-impress itself upon currency traders. Should this prove insufficient to sway their investment biases, then perhaps growing intolerance for the Fed’s willingness to abandon its obligations as steward of the world’s reserve currency and, instead, to debase the dollar with QE2 (quantitative easing) might provide more motivation.

The next G20 meeting is scheduled to convene in South Korea. Europe, Japan, Brazil, and other nations are bound to protest that the U.S. cannot unfairly and indefinitely hold onto its seat to the disadvantage of others in this global charade of ‘beggar-thy-neighbor musical chairs’.


Originally published at hillbent.com and reproduced here with permission.  

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