Sell Euro Rallies After Weak GDP Indicates Continued Recession

May.17.13 | About: CurrencyShares Euro (FXE)

Euro bears continue to see mounting evidence supporting their positions, with the latest example coming with this week's release of GDP data. On a quarterly basis, total output figures in the eurozone fell by -0.2% (slightly worse than the -0.1% decline that was expected by analysts). This equates to a -1% decline when looking at the yearly figures. But while these numbers are a clear expression of weakness, the more alarming point is that this is the sixth straight recessionary quarter, as contractionary conditions have been in place since late 2011. This damages the medium-term prospects for the EUR/USD currency pair and for the CurrencyShares Euro Trust (NYSEARCA:FXE), which closely tracks the performance of the broader activity in the euro.

Regional stock markets are still trading within striking distance of their yearly highs, so at this stage there is a major disconnect between what is showing in macroeconomic data and the elevated stock values that are being pursued by investors. If we start to see corrective declines (propelled by profit-taking) in stock markets, we will start to see renewed focus on the euro itself as the added turmoil in financial markets will prompt additional discussions centering on the possibility one or more member nations will be forced to leave the European Monetary Union (EMU).

Weak Global Positioning Makes Euro A Sell

This week's data adds to the bearish arguments for the euro, but when we view the data in the context of what is being seen in other major economies, another test of the yearly lows at 1.2750 starts to look imminent. Specifically, quarterly GDP in the U.S. came in at an increase of 2.5%, and the metric was even stronger in Japan, with a rise of 3.5% for the same period. Improving growth was even seen in the U.K., which is somewhat surprising given the recent credit downgrades for the British economy.

Because of this, the euro should be viewed with a bearish perspective against its counterparts, with the U.S. dollar likely to be the biggest gainer of the bunch. This improves the medium-term prospects for the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP), as any major concern for the euro will re-ignite the safe haven allure of the U.S. currency.

Price Perspective

All of these factors viewed in combination suggest a test of at least the yearly lows in the EUR/USD. The FXE and UUP ETFs can be used to express this view, with most of the negative momentum clearly centered on the euro:

The price activity in the EUR/USD presents another telling picture, as the currency pair formed a head and shoulders pattern on the medium-term charts, and this was followed by a clear break and daily close below its neckline. This activity puts prices on a clear trajectory for a retest of the yearly lows at 1.2750, and the FXE Euro ETF remains a sell at least until prices in the EUR/USD reach this level.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.