Euro Weekly Trend Line Under Attack

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 |  Includes: FXE, UDN, UUP
by: Marc Chandler

Summary

A trend line drawn off the 2012 and 2013 lows comes in near $1.3470 next week.

While we look for the dollar to trend higher against the euro over time, we are suspicious of a move now.

The main drivers have not changed.

This Great Graphic, created on Bloomberg, is a weekly bar chart of the euro. In July 2012, the euro approached the $1.20 level, the lowest level since it bottomed in 2010 just below $1.1880. Last July, the euro slipped toward $1.2750.

The trend line that connects the two events comes in near $1.3470 next week. This is just below the low for the year set in February.

A key issue is whether this trend is violated. Technical considerations warn that this is indeed the risk. Although, we expect the dollar to strengthen over time, we are suspicious of a break now. The flows into Europe may be shifting away from peripheral sovereign bonds and equities toward bank loan portfolios and mortgage related securities. Meanwhile, the May current account surplus of 19.5 bln euros reported earlier today brings the 12-month cumulative surplus to 2.3% of GDP compared with 2.0% of GDP in the 12 months through May 2013.

On the US side of the equation, despite a cacophony of voices, the key signal from Yellen is that there is still significant slack in the labor market, inflation reports are still noisy, and while there are some excess evident in some asset markets, the Fed will maintain its course. It will finish tapering in October and the first rate hike is most likely still some way off. Yellen accepts and wants investors to accept the fact that despite vast amount of information that is available, the Fed's ability to forecast the economy is far from flawless. As economic activity unfolds, the Fed's stance will evolve. The judgment of the Federal Reserve is superior to blindly following some rule-based formula that is to be the best in all times and under all conditions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.