What's Up Next for the Euro/Dollar Tango?

 |  Includes: FXE, UUP
by: Romeo Fayette
  • EURUSD close to a near-term bull catapult to $1.50 if it can capture $1.40 soon.
  • Long-term, remember that the U.S. Dollar Index (DXY) has started a secular bull.

Economists and journalists have watched the EUR/USD tango with bewilderment over the past three years. The swings have been volatile, and I've seen quite a few FX traders perish at their wits end. The Money Game captures that "bewilderment" this morning:

Amazingly, the euro is the standout performer of the day, defying everyone's expectations.

I'm no Forex (FX) trader, but I think it's funny that so many macro guys turn to fundamentals in FX analysis. While Goldman Sachs (NYSE:GS) advised clients toward capturing the downside of every FX swing in 2010, more technical analysts like Citi FX have had a better go at it through these tumultuous times. That's no anomaly, FX has always been a technician's playground.
So I sit here today, a few months away from a romantic week in Italy, and I'm thinking that I should maybe buy some Euros. In talking to a few analysts here, then taking a consensus of some colleagues: the expectation is for a Euro rally back to US$1.50. But, I'm fundamentally opposed to analysts' opinions and consensus.
(Click to enlarge) EURUSD weekly- broad range downtrend since August 2008.
In all likelihood, we'll see EUR/USD rally up to its bearish trendline on the weekly chart above. Since momentum is at its back, I can see it breaking into a new, bull trend in a new range between US$1.40-1.50.
(Click to enlarge) EURUSD daily- first resistance just below $1.38 with MACD having busted through a support line back in November 2010.
The daily chart has its first test looming at $1.38. The caveat would be the MACD's recent violation of its support line (circled above). That's not a tradeable event as confirmation of a trend reversal is still pending--particularly given the more powerful, bullish trend in the weekly chart.
My verdict awaits the crossing of $1.38, then the capture of $1.40, which would coordinate long-term with short-term in bullish unison. Take a gander at the extended daily chart to see the buildup to this first resistance:
(Click to enlarge) EURUSD daily extended- substantiating the $1.38 1st resistance.
All and all, I'm noticing capital's lack of willingness to seek the USD & U.S. Treasuries throughout the contagion of social unrest in the Ivory Coast and Northern Africa (Tunisia & Egypt). Perhaps I could read more into the growing pricing gap between Brent Crude and American-based NYMEX light-sweet crude oil too. I withhold conviction on the near-term EUR/USD fate, but with the aforementioned capture of US$1.40, I'd be buying the Euro Trust ETF (NYSEARCA:FXE) for my vacation this spring.
As I noted in my 2011 Outlook:

... the monthly chart of the U.S. Dollar Index shows that a secular USD bull began back in March 2008 ... [but] the shorter term daily chart shows pending resistance just under 81.50. A failure at that double top would confirm the developing bearish trend in the daily trend, and doom the weekly chart to produce an ugly 2011. Such a failed double-top would lead me to short the USD.

That's exactly what has developed.
I'll leave you with a side-by-side comparison of the EUR/USD & DXY monthly charts, something to keep in mind over the coming years:
(Click to enlarge) EURUSD v DXY monthly- the long term waves suggests that the EUR has started a secular bear trend, while the USD is actually beginning a bull.
... I know it's hard to believe.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FXE over the next 72 hours.