Euro/Dollar Trapped Between The Fundamentals And Sentiments

 |  Includes: ERO
by: Forex Abode

After being in a bearish trend for a long time, EUR/USD started showing some bullish signs. The high on September 17th, 2012 was 1.3172; after a drop to 1.2804, the subsequent high on October 17th was 1.3139. The next high on was on December 5th, which had taken place after a drop to 1.2661. This level was lower than the previous two peaks when EUR/USD had failed to break over 1.3126.

Recent optimism about the Greece crisis handling and the progress for joint resolution for the stability of failing banks made the currency pair jump over the psychological level of 1.3000. EUR/USD went as high as 1.3187 which was 15 pips above the high of September 17th, 2012.

Fundamental Highlights:

Euro zone crisis: Some optimism has come up because of the progress made for agreement for working a joint resolution for failing banks under the leadership of ECB. There is some confidence building about the developments in controlling the Greece crisis as well. However, the market might have already taken this optimism into account by the recent upward moves. There is still a conflict between the optimism and the underlying fear as none of the steps in crisis control can bring any immediate results.

Economic Events Highlights:

Euro region PMI: The preliminary releases for purchasing managers index for manufacturing showed poor data during December 2012. It remained poor across European Monetary Union, Germany and France. On the other side the PMI for service sector came out better than the consensus form all these regions. Overall the effect of the price volatility of Euro is more by manufacturing PMI.

Euro region Consumer Price Index releases: December 2012 reports showed a change in year on year core CPY as 1.4% against the previous 1.5%. The data was lower than the consensus of 1.5%. The year on year change in CPI was same as the consensus of economists which was 2.2%, down from previous 2.5%.

Employment Change in European Monetary Union: The change in the employment on year on year basis remained same at as the previous release i.e. -0.7% and indicated that the in Q3 the drop in employment remained same but the quarter on quarter change in employment was -0.2% in the 3rd quarter of the financial year. It was lower than the consensus and previous 0% change. The employment situation is throwing a negative outlook in general when the debt ridden Greece and Italy are having major crisis on employment front. Greece unemployment had crossed 25% level to 25.4%.

Economic releases from U.S.:

Consumer Price Index releases from U.S. are due at GMT 13:30 followed by Manufacturing PMI at GMT 13:58 and Industrial Production at GMT 14:15.

What to expect from EUR/USD:

As we saw above that all subsequent highs of EUR/USD have been getting lower since September 2012. The current price action has been finding resistance below the previous highs and especially 1.3100 region poses a high resistance. Also, as mentioned above, the upward jump might have already factored the wave of optimism and possibilities of some consolidation cannot be ignored.

Hence, overall we have the recent wave of optimism on one side and the pressure of the resistance zone on the other side. The currency pair breaks above 1.3126 and more importantly 1.3139 then it may go up to retest 1.3171 and with a break of that first towards 1.3280 and then possibly 1.3470. However if these resistances hold than some consolidation towards the support zone of 1.3020/1.3040 should take place.

The fundamentals are mixed. On one hand the fear about the overall economic health of the Euro zone exists, as no reforms can bring any immediate results. On the other hand the supportive sentiments for the Euro are very much in place because the survival and stability of the Euro is critical not only for the Euro zone but for the overall global economy.

EUR/USD and Investment outlook:

  • Forex Market: Considering the way EUR/USD is expected to move, a mid-term buying position in the foreign exchange market for Euro and against the U.S. Dollar may be advisable when some downward consolidation takes place. Forex market carries a high risk and hence for any such positions the stop-loss orders should be carefully kept in place and should not be much below 1.3000 levels. Any short-selling at current level may prove to be risky.
  • U.S. Investors for European Assets: With Euro getting stronger, any European assets are supposed get more expansive in U.S. Dollar term. A correction in the market can be expected because of underlying fears, despite the current optimism, and hence any such investment decisions need to factor these possibilities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The views are based on the fundamental facts and price action, but these remain the author's outlook and not investment advice.