The predominant vision is that the EUR/USD will adjust downward in the coming weeks. The first signal is sent by gold (see chart below).
The disconnect suggests that the EUR/USD should be around 1.28. The problem is, gold already sent several wrong signal in October and December 2012.
Any negative feelings on the EUR/USD should be accompanied by a similar vision (bearish) on the S&P 500. The correlation is good, as can be seen in the chart below, and the disconnect is only recent and limited.
If the EUR/USD goes down to 1.28, the SP500 should dive to 1430-1450. This is a scenario that many investors seem to favor, and a scenario that cannot be excluded (-7% for the SPX).
The chart below suggests that the underperformance of European equities relative to U.S. indices has been a frontrunner in July 2012.
However, I recommend caution, because the link between EUR/USD and Eurostoxx has not broken down until now (second chart).
The analysis of the EUR/USD against sovereign 2-year spread (T-note vs. Shatz) confirms the EUR/USD is overpriced. Once again, 1.30 would look like fair value.
Another reason to worry about a lower EUR/USD is the excessive enthusiasm on European growth. The ZEW helped raise the euro earlier this week, but the comparison of PMIs (EUR vs. U.S.) implies a lower EUR/USD (1.30).
Finally, in the context of electoral uncertainty, and the waning effect of the Draghi Put/OMT, we cannot exclude a widening of bono-bund spread (this week 1-year bond auction in Spain will be a good test). This indicator will not be valid forever but it can serve as a guide for the next few weeks.
On a 1-year horizon, I am bullish EUR/USD, as it should reflect the slow economic improvement, the ECB's refusal to enter the currency war, and my target of 1680 for the SP500.
On a 1-month horizon, the cross-asset charts are rather bearish and suggest a euro close to 1.30/1.31.