The Battle for the Euro Trade

By David Russell

If you've been on the edge of your seat watching the bulls and bears vie for control of stocks and the VIX in recent sessions, you haven't seen anything compared to the struggle going on in the currency market.

The battle has been most intense in the euro/dollar pair trade, which has a huge influence on the price of commodities such as oil and gold. Given Germany's importance to the euro and its status as the world's largest exporter, the euro remains one of the most important measures of risk appetite and global growth--especially when compared to a "weak" currency such as the U.S. dollar or the Japanese yen.

The bears have landed some significant body blows on the bulls in the last few days, seen in the charts below. Each time, the ursine forces have driven euro/dollar back to a trend line that began in early April. (See daily chart above)

The good news for the bulls is that they keep lifting themselves from the upward trendline, continuing to validate it as support. The hourly chart (right) shows how the euro/dollar has continued to make higher lows each day this week. While there is still danger of breaking through to the downside, the bears get weaker each and every time the bulls survive.

The next big level to watch on the currency pair is about 1.41, which some traders are viewing as the neckline of a potential "head and shoulders" pattern that formed earlier in the month. The euro/yen failed at that level yesterday, and the S&P 500 followed it lower. It also would not be surprising to see some big short covering if that level is taken out.

Today and tomorrow may represent the final rounds in this slugfest between the bulls and the bears. The question is whether the bears will land a late-fight knockout punch, or will the bulls win on the point count?

(Chart data provided by FXstreet.com)

Comments

[RiskReturnO...:]

Any breakout in Euro:Dollar will support carry trade. Go long on DBV to capture the next move.

Jun 11 02:03 PM

[Dave Wrixon:]

When the dollar cracks it is going a lot lower than 1.43. We could even be talking as much as 2.00 by the end of the Summer. After that who knows? It just depends what new innovative uses can be found for the stuff, like shoving it into solid fuel boilers to keep warm. Mind you if you are going to heat the nation Bernanke is actually going to have to ramp up the physical printing a good deal. You can burn an electronic expansion of the balance sheet.

Jun 12 04:47 AM

[manya05:]

Yes, dollar is doomed. As soon as other countries get some confidence back and they stop depreciating their currency, the dollar may be the last one left in the room when the roof collapses. Just in case, all my cash is denominated in a basket of non-dollar currencies, I do not think the people in charge know what they are doing when it comes to monetary policy, they are gambling with our future.

Jun 12 11:05 AM