This is a guest article written by Tom Cleveland, analyst for forextraders.com. Tom offers his medium-term insight on one of the most popular currency pairs – the EUR/USD.
A subtle calm has settled over our financial markets, as if the sugar plum fairy had grown tired of the volatility at hand and sprinkled magic dust upon it. The “VIX” is down from recent highs and hitting levels not seen since early August, although still somewhat above what could be termed “normal” these days. While the world takes a “breather”, the time may be right to polish up the old crystal ball and forecast material medium-term estimates for the coming year.
Since Europe has maintained its “grip” on uncertainty and dominated the financial headlines, it seems only right to focus on the “EUR USD” currency pair for guidance for the six months ahead. Remarkably enough, the Euro presently seems stuck at $1.30, about where it started for the year and where many expected it to end up when 2011 was closed for the history books.
2011 has been a rollercoaster ride for this pair, as well as for most any heavily traded security in our global financial markets. The diagram below provides insights on what has transpired and what may happen down the road:
As can be easily discerned from the candlestick behavior depicted above, the Euro has been “channel-bound” in a downward trek since August. The recently popularized Ichimoku trading indicator system has also been superimposed on the chart for guidance. This Japanese indicator strives to present “one look”, a rough translation of Ichimoku, by means of a combination of moving averages and its most distinguishing feature, the “Kumo Cloud” that actually stretches out into the future for another month or so.
Additional indicators and lines have been added for enhanced clarity, but the “Cloud” literally hangs over the Euro like a barrier of impenetrable resistance. On only two occasions over the past few months has the Euro mounted enough steam to penetrate the Kumo Cloud, perhaps due to “irrational exuberance” over a particular summit meeting that was designed to generate investor confidence, only to fall flat once the details were released.
The “Average True Range”, or “ATR”, indicator reflects a lessening of recent volatility, following the latest round of summit talks. The market continues to look for substantive actions to follow each set of official pronouncements, but, in the absence of major structural reforms, each round of discussions has led to another step-down valuation process in the fortunes of the Euro. Recent support at $1.30 may only be another temporary “step”.
Fundamentals for Europe are not shaping up for a recovery either. Government officials recently cut back their 2011 estimates for GDP growth to 0.5%, hinting at the same time that growth in 2012 may also be retarded as countries move toward austerity as a platform for better economic results, possibly in 2013 and beyond. A stronger U.S. economy may more than likely lead to a stronger Dollar in 2012, another reason to believe that the current positioning is but a pause before another market reckoning.
Under this backdrop, the medium-term forecast for the Euro is more of the same downward slide beneath the Kumo Cloud. The blue and lime-green moving average lines crossed, a “sell short” signal, back in November and show no signs of reversing on the current horizon. In the next month or so, the Euro may “tag” the cloud once again, but all “technicals” are trending south, suggesting a new support level of $1.20 some six months in the future. Net open interest positions in our futures markets are also heavily weighted in the “sell short” direction.
The Euro’s resilience has confounded many analysts, but gravity may eventually have its way.