How High Will Euro Rise?

Jan.25.13 | About: CurrencyShares Euro (FXE)

Euro rose to an 11 month high today against the U.S. dollar, and many investors are now wondering how much further the currency pair can rise. From a technical perspective, the pair is poised for a move to 1.35, with the 1.3485-1.3525 level being the next major area of contention. In this zone, we have the big psychologically significant 1.30 level -- last year's high -- the 200-week SMA and 50% Fibonacci retracement of the 2011 to 2012 sell-off. This will be a very important level, especially since 1.35 is a big round number. The weekly charts also show an inverse head and shoulders pattern that supports the case for further gains.

From a fundamental perspective, the EUR/USD rally also has the blessing of the central bank. ECB Governing Council member Luc Coene said the level of the EUR is not a problem now, and there is no need for additional easing. His views are consistent with other members of the central bank, including ECB President Draghi, who said he sees a second half eurozone recovery. While excess EUR/USD strength is a problem, we don't believe that the central bank will be concerned until the EUR/USD reaches 1.37-1.40.

Economic data from Germany has also been very good, which suggests that the eurozone's largest economy may continue to carry growth for the region. Business confidence rose to its highest level in 7 months. With improvements in both current assessment and expectations for Germany, the IFO index rose to 104.2 from 102.4. The IMF downgraded their forecasts for eurozone growth this year, but between the strong increase in PMI and the solid rise in IFO, there's a very good chance that German growth will exceed expectations. The expectations component of the German IFO report tends to have a strong correlation with German GDP growth.

The central bank is also taking initial steps to unwind stimulus with LTRO payments, which was the biggest story in Europe today. According to the central bank, 278 financial institutions plan to repay 137.2 billion euros next week, significantly more than the market's 84 billion euro forecast. This suggests that the balance sheets in the financial sector are stronger than expected, which bodes well for confidence in the eurozone's banking system.

While the peripheral countries could still face weaker growth and elections in Italy next month could increase uncertainty, for the time being, the EUR/USD has fundamental and technical support for a continued rally to 1.35, and depending on how it behaves there, the rally could extend as high as 1.37.

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.