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We have written several articles on the US Dollar - Euro pair and have been bearish since it failed at 1.60 and [link widoczny dla zalogowanych] it's piled up a huge gain. So where is the pair going after the big gains in the euro on Friday? Let's take a look.
Let's take a look at both the fundamentals and then some technical levels, fundamentals first:
The euros fall from the 1.60 has seen fall down to below 1.40 in a dramatic decline and as we pointed out before:
The euros true value in purchasing terms is about 1.20!
The whole rise in the euro in recent history has been driven purely by interest rate perceptions - with the view the euro would hold the advantage. When this view changed and sentiment shifted, the decline was dramatic.
Interest rates now clearly favour the US dollar and we expect more selling in the euro.
A Short Covering Rally
So we would simply view this rally as a long overdue short covering rally and the fundamentals point to a euro [link widoczny dla zalogowanych] which could, test and break its lows. The euro is [link widoczny dla zalogowanych] deeply oversold and to many weak speculators hold shorts and they need to be shaken out of the market.
Now let's look at the charts and see where the rally might go.
Pull up a chart of the currency pair and put these indicators on the [link widoczny dla zalogowanych] chart - Bollinger Band, Stochastic and Relative [link widoczny dla zalogowanych] strength Index (RSI). If you don't know how they work simply look up our other articles, there easy to use and very powerful in giving you clues to future price direction.
Check Resistance and Momentum
On the chart the first resistance [link widoczny dla zalogowanych] is around 1.44 and then 1.45 (the mid average of the Bollinger Band) and Major resistance is at 1.48. Now pull up the RSI and stochastic, [link widoczny dla zalogowanych] these give you the momentum of price -RSI is starting to flatten out after a strong rise and the stochastic is up.
A good way to trade the pair is - you know a short covering rally is underway but the major trend is down, so wait for it to run its course.
Confirmation
A cross in the stochastic supported by the RSI into one of the resistance levels, will indicate a possible end to the relief rally. The key is a cross down on the stochastic with bearish [link widoczny dla zalogowanych] divergence. DONT sell and predict - wait for confirmation that momentum is down into a key level.
This is the first major short covering rally we have seen, so it could be quite spiky and a good way to play it and get limited [link widoczny dla zalogowanych] risk is - to use at or in the money put options with plenty of time to [link widoczny dla zalogowanych] expiry. You can of course play straight forex, with stop closes, behind the key [link widoczny dla zalogowanych] level you sell at.
Is the euro bear market over?
Probably not, the currency still has downside but the sentiment is at a bearish extreme.
We need to see a relief rally and this is occurring right now. We think it will allow another opportunity to sell, for a test of the lows, we shall see.
This article was written on Sunday 14th September 2008.
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