5 Reasons to Doubt the Euro Rally

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EUR/USD made a remarkable recovery in the past week, but it didn’t manage to break above critical resistance. Is this a sign? Or is the common currency taking it step by step? 5 reasons to challenge this rise.

1. Portugal At the beginning of the week, Portugal seemed to be very close to getting a bailout. Then, China and Japan pledged to help the troubled Euro-zone countries. And bond auctions were covered decently. Confidence returning to the old continent?

Not so fast. The yields on these bonds were still high. Portugal managed to raise money, but it still isn’t sustainable.

EUR USD Cannot Break Higher

EUR USD Cannot Break Higher - Click to Enlarge

2. Spain And what about Spain? This domino is too big for the current bailout fund. Germany, which was somewhat hesitant about enlarging the fund, then made it clear at the end of the week, as the finance minister said a clear Nein!

Spanish bond yields on ten year notes eased from 5.50% to 5.33%. Better, but still high, higher than after Trichet began buying bonds, when they fell to 5%. Spain is still in the danger zone.

3. Inflation The Euro got a boost from Jean-Claude Trichet once again, this time on his focus to curb inflation. This isn’t new – also in his previous conference, he boasted that inflation is contained, and that the bank is achieving its goals. Is a rate hike coming soon? Will it boost the Euro?

With the current fragile situation in many countries, a rate hike could destroy any signs of real recovery. The Euro-zone’s unemployment rate is 10.1% – it didn’t go down for a long time. Does the continent really need tightening measures? I believe that Trichet will face pressure not to raise the rates.

4. Weak US figures – One of the main drivers of improvement was an improvement in weekly unemployment claims – and in the past week, there was a big disappointment – 445K. This is back to the previous high range.

But, many experts say this is seasonal. This is still to be seen, but one week’s jump still isn’t a sign. As it was important to wait for more good data to point to an improvement, more bad data is still necessary to prove that this wasn’t seasonal.

5. Technicals EUR/USD managed to retake 1.2970 and 1.3080, two important support lines that turned into resistance after the fall. And indeed, it continued marching forward, moving higher in the previous wide range.

But it stopped short of the critical resistance line of 1.3440 – the line that capped it so many times in the past. A temporary rise above this line was very short lived. We’re still in the same range for almost two months, and even slightly leaning lower. Only when EUR/USD sits comfortably above this level, we can say that the bulls are back in town.

We need more signs to be convinced…

Further reading – EUR/USD – Selling the Pullbacks – Elliot Wave Analysis

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

12 Comments

  1. Please don’t be putting all negative thought, whenever EURO performing, there’re some sort of negative comments came out and condemn it… Human has been rounded by negativity and it’s created by human it self. I am positive person, and I believe EURO will move up to 1.4300 to 1.4500 level, a price that consider fair value to EURO…

  2. Thanks for sharing! Guess there are few pips to be made on the resistance testing. Lets prepare for the ride!

  3. So Vin Lee, you think it will take nothing more than “Positive” Thinking to get the EURO to make a stand and rally to 1.4300 – 1.4500??

    Is this “New Age” trading at its best?

  4. I see a large area for the eur/usd to move up. Little resistance till the 1.38 level.

    However its still in a downward channel from november. H4 chart

    lows of channel november 30th to january 7th

    highs of channel Decemeber 14th, january 4th and january 14th

    This helps with my analysis

  5. € has been baddly valued in the last 2010’s months. However not only again the USD, but mainly again the AUD, CAD, and JPY it passed strong level in its bullish way. Due that USD is not less ”weak” currency, AUD due to China’s rate. EUR could reach 1,37, and then we will be in February when US Congress needs to extend US negative balance. So March could see 1,40. But the better bullish are EUR/AUD, EUR/JPY or USD/AUD, USD/JPY.

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  7. Euro’s going down down down, most of ya’ll’s comments reiterate that vie, 1.26, even 1.19 (fair value)

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