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Has the Euro Again Found Resistance Above the 1.42 Level?

The last time the EUR/USD pair ventured above the 1.42 handle, making a high of 1.4280 on 11 02 2010, the market topped and subsequently retreated to 1.2982 on the last day of November.  If we compare the spec positions reported by the CFTC COT reports, we find that the spec is a bigger long in the euro now, than he was at that time.

The total Open interest (NYSE:OI) at that time was 285,225 contracts, a very robust number.  According to data from the 11 02 2010 COT report the specs at that time had accumulated a euro long position of 43,640 contracts.  That means that the big and small specs combined were net long 15.3% of the total market. 

When we compare these positions with the current COT report, we find that the specs are now much longer in the euro, than they were in November.  The total OI is lower, only 228,442 after liquidation in the March futures contracts.  But the total spec long position in the euro is now 64,682 contracts, or 28.31% of the total OI.

One of the drivers for the euro strength has been the concern about the global increases of food and energy, and how they must increase rates back to normalcy to make sure the inflation does not spread.  Traders had been embracing the pound also, hoping the continued surge in inflation indexes would hasten the day when the Bank of England would raise rates.  Today the pound took a hit when their was little indication in the latest MPC meeting this would be the case.  With the euro such a lop sided long, the euro bankers best keep hinting that higher rates are just around the corner, or there may be euro longs heading for the exit.

It is not like there is clear sailing for the euro.  Portugal is holding an election and it is expected the ruling Socialist party will be removed from office.  Rates in Portugal are creeping higher, with five year notes trading at a new high of 8.05%, and there is increased talk a bail out request is imminent.

Part of the Euro strength has been caused by USD weakness.  One of the  drivers for the soft USD has been the Fed's stance on QE 2.  According to the London Telegraph, they reported that Richard Fisher, the head of the Dallas Branch of the Fed made these comments at a recent speech in Germany.  He said he is opposed to any further extension of QE2.  Now a voting member of the Fed, he claims the additional liquidity has not helped unemployment, has weakened the USD, and caused speculative bubbles to emerge.  Perhaps the market will start to ponder what happens when QE 2 ends.

This may not be the stuff that makes for a bull move in the USD, but the  market is so loaded with euro longs, buying strength, expecting up side follow through past the 1.42 level looks like a loser.   We prefer the short side of the euro versus the USD but not quite sure where to enter