If it goes up, it’s probably going higher, but if

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We have seen the EUR flirt with either side of the 1.3000 level today and the question has been asked, which way are we going now? If you check with the technical analysts, you’ll probably get the answer that’s in the title to this piece. But really, where is the EUR going?

If you look at the economics, one would argue the EUR was headed lower. Economic data released the last few days shows the bellwhether of the Eurozone economy, Germany, not doing very well. Most economists expect the German economy to continue to contract. If the best is bad, how could the others be better? So, if the economy of the Eurozone is faltering, shouldn’t the currency begin to feel some pressure?

There are expectations that the ECB will eventually have to respond to the fundamental weaknesses with a rate cut, maybe as soon as next week. WIll this be the action that finally pushes the EUR lower? If, as expected the ECB moves rates lower in the near to medium term, will that be enough? Probably not. Many observers expect that the ECB governing council will introduce other measures later this year. In other words, they expect the ECB to begin some sort of easing cycle into 2014 as the region struggles to to break the bonds of recession.




And there you have it! Is the EUR going lower? Eventually. But not too much lower in the near term. Until the ECB develops some sort of easing mechanism, the grinding up and down will continue. Look at the British Pound, US Dollar and Japanese Yen. All moved significantly lower only after easing was entered into the equation. This probably does not occur until the end of the 3rd quarter of 2013.

Until then, we will range trade. At the present time the downside needs to clear 1.2950 to gain any momentum. That break should take us to 1.2840. The next level would be 1.2750.

On the other hand, a break of 1.3120 would see a move to 1.3200, and this would pave the way towards 1.3340. This whole move lower and higher is part of the bigger move from the 1.370 level to 1.2745. After bottoming at that level (1.2745), we have seen the EUR at times look extremely bid and at other times very well offered.

The last piece of the puzzle is ECB President Mario Draghi. He has an uncanny knack of saying the right thing to support the EUR and manages to do that at every ECB meeting press conference. Rest assured, even if the ECB lowers rates next week, President Draghi will place a positive “spin” on this.

UP or DOWN? I may be a technical guy, but I have to lean towards the economics of the situation. While the US economy, tends to stumble, with poor results on NFP and durable goods, for the most part, the US economy is improving. These “stumbles” probably will keep the FED from tapering quantitative easing in the near term, but given the information we have received from Germany (weak Ifo and ISM), the US economy is doing better than the Euro zone. Therefore the porr European data should eventually weigh on the single currency moving the EUR towards 1.2600.

Further reading: EUR/USD forecast.

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About Author

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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