For the last two months, the Euro (EUO, FXE) has been in decline which has resulted in the currency tumbling from a high of 1.1894 to a low of 1.1250. However, I believe the decline has now come to an end as the currency is at a critical crossroad. Hence, in this article, I shall highlight the upside and downside potential of the Euro Index. Thus, to establish the likelihood of all scenarios, I will look at the fundamental news affecting the currency, whilst, also analysing the chart using technical analysis tools.
One of the biggest factors affecting the Euro is the Brexit deal. This is as there is a high level of uncertainty regarding the future success of the Brexit agreement. I say that as investors had expected the Euro to have a rally when Theresa May agreed on an exit deal with the European Union. However, this did not occur due to the higher risk associated with the Euro. I say this as the Brexit issue has increased the stress level on the Euro, which in turn has resulted in the buying interest shifting from the Euro to other currencies such as the U.S. Dollar and Japanese Yen. Thus, I believe the currency will only provide a clear direction to investors after the December 11th Brexit vote. Moreover, if the Brexit deal does gets rejected then I expect the Euro Index to fall against all currencies expect for the Sterling. This is as the United Kingdom will have severe troubles of its own as this would most likely result in a vote of no confidence for Theresa May. However, if the Brexit deal does go through the parliament then I believe the Euro will have a bullish rise against all currencies expect for the Sterling. This is as the Sterling bulls will have a breath of relief from all the troubles they have had off late.
The latest set of German statistics are excellent. This is as the ‘Manufacturing Purchasing Managers Index’ rose in November to 51.8, against a prior value of 51.6. This is bullish for the Euro as the manufacturing sector dominates a large part of the total GDP. Thus, a rise in Germany’s manufacturing PMI shows an improvement in business conditions and the overall economic condition. Moreover, the services PMI came in at 53.3, which is the same as analyst estimates. This is excellent news for the Euro as it shows a level of consistency which in turn will help bolster the Euro’s standing. However, I do not believe these statistics are enough to counter the bearish strength of the Brexit fiasco.
The latest set of Eurozone statistics have provided the Euro’s bulls with a glimmer of hope. I say that as the Producer Price Index value for October came in at 0.8%, against a prior value of 0.6%. Additionally, this value surpassed analyst estimates as they had it pegged at 0.5%. Moreover, Eurozone’s PMI Composite value for November came in at 52.7, which is higher than the prior month’s value of 52.4. This is positive news for the Euro and I believe it will ensure that the currency trades within a box range pattern in the coming days.
The currency’s daily chart indicates that the Euro is at a critical crossroad. I say this as the Index is presently trading in a sideways pattern. Moreover, the candle signals have been getting smaller as they go along which clearly indicate that a big move is underway. The only issue is that we do not know whether the move is going to be on the upside or on the downside due to the upcoming Brexit vote in the British Parliament.
The upside potential of the currency presently seems to be extremely low. I say this as the Euro is trading below its 50, 100 and 200-day moving averages. However, if a bullish reversal were to occur, then I would expect the Euro to rise till the range between the 100% and 127.2% fibonacci resistance levels. The 100% fibonacci resistance level is at 1.1453, whilst, the 127.2% fibonacci resistance level is at 1.1489. However, if the Euro does breach the 127.2% fibonacci resistance level, then I do not expect the rise to go beyond the 161.8% fibonacci resistance level at 1.1535.
A downside move in the Euro seems to be the more likely scenario in the coming future. I say this due to the formation of a ‘Doji’ candle pattern. This pattern psychology indicates to traders that there is a balance between supply and demand. Thus, if a bearish breakout were to occur then I believe the Euro will fall till the range between the 61.8% and 78.6% fibonacci support levels. The 61.8% fibonacci support level is at 1.1305, whilst, the 78.6% fibonacci support level is at 1.1272. However, if the Euro does breach these support levels, then I do not expect the fall to go beyond the 100% fibonacci support level at 1.1229.
The big picture:
Overall, I am leaning towards the bears and bulls having a push and pull which will result in the Euro trading in a box range pattern. The only time I expect this pattern to be broken is when the British parliament provides its decision on the Brexit deal. This opinion of mine is driven by the fact that the fundamentals and technicals of the currency support a sideways movement. However, whichever way you decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.
Good luck trading.
Disclosure: I/we 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.