What's Next For EUR/USD? $1.38? $1.40?

 |  Includes: ERO, EU, FXE, UDN, UUP
by: FXstreet

The euro has managed to rapidly leave behind the tough barrier at $1.3500, early on Wednesday morning. This is being helped by the seemingly endless appetite for risk and the consequential triggering of stop-loss orders. With the FOMC gathering only poised to build upon December's rhetoric, thus leaving the status quo, the table is served for EUR/USD to escalate further, aiming for key levels at $1.3560 (200-week moving average) and November 2011 highs around $1.3615/20

… It's not the economy, stupid!

There seem to be two opposite realities dominating eurozone consciousness lately: the 'over-optimistic' one, worshiping only risk appetite and moving blindfolded along with its trends. This worldview is prevailing at the moment and is expected to extend the rally post-ECB in the upcoming sessions.

And there's the other one. The reality which rests upon the majority of the (macro) economic-oriented FX community. The one in which participants are still perplexed as to the recent rocketing of the shared currency and are trying to make sense. The new tighter conditions imposed by the ECB have ushered in higher yields in peripheral debt markets in response to a more stabilized financial sector, and is the proper excuse the euro was looking for to climb to higher levels.

However, in the broader context of monetary easing, the ECB is swimming against the current, and the last thing the eurozone needs now is a higher exchange rate to negatively affect the terms of trade, thus adding another obstacle to a real and sustained recovery in the bloc which will eventually materialize at some point. It is pointless to highlight the deeper contraction of the Spanish economic activity if its debt market is indicating the exact opposite. What about the astonishing unemployment rate? It doesn't matter, nobody cares anyway. Spanish Prime Minister Mariano Rajoy keeps walking proudly and reminding the financial community of his 'prowess' in saying 'No' to the financial aid.

Reality dictates that bond yields and differential spreads are leading the way now and risk appetite must provide order to the chaos.

A note of technical analysis by expert Karen Jones at Commerzbank:

the market maintains upside pressure and has now reached long-term resistance at $1.3485/$1.3562… This is a tough band of resistance and we look for this to hold the topside and provoke failure.

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.