Euro Still Looking Weak

Euro Still Looking Weak

The Euro has been one of the biggest losers of the month, and it is not looking like the tide will turn any time soon for the shared currency.  The outlook for the Euro is clouded by a few different factors and the recent chart activity gives investors a good indication of where prices are likely to be headed for the remainder of this year.  "The EUR/USD currency pair met with a forceful rejection just below the 1.40 level,” said Vlad Karpel, options strategist at TradeSpoon.  “This area will now be viewed as critical as it represents a clear psychological this must be overcome in order to generate an uptrend.”

For those that are mostly trading the forex markets, this will mean that the EUR/USD could be experiencing some violent and volatile moves over the next few weeks.  For those that are more interested in ETFs, it will be important to watch for similar changes in the Guggenheim CurrencyShares Euro Trust (FXE).  Relative to most of its counterparts -- such as the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP) or CurrencyShares Japanese Yen Trust ETF (FXY) -- FXE should be trading under pressure as we head into the summer months.  

Stimulus and the Problems in the Eurozone

One of the problems with the Eurozone is the fact that economic activity is far from uniform and some countries are clearly in a more favorable condition than others.  Some of the more negative examples here would be found in countries like Spain, Portugal, and Greece, where unemployment rates are still excessive and unlikely to improve much this year.  Other areas (Austria and Germany, for example), jobless rates are actually much lower (even lower than in the US).  This helps to explain why the iShares DAX ETF (DE) has shown better rallies than the stock benchmarks seen in the Eurozone’s periphery.  

These wealthier countries have been bailing out the weaker ones as they have largely funded the stimulus programs that have been enacted by the European Central Bank (ECB).  But what some investors have started to ignore is the fact that the ECB still has room to stimulate the economy, and this could send a major shot to the Euro itself.  Stimulus programs create more currency running through the system and this creates the potential for inflationary pressure to start building.  European investors are now much more likely to start trading their cash in for alternatives.  

One that comes to mind in this type of scenario is the precious metals space, and this means activity in the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Silver Trust ETF (NYSE:SLV).  But there is also the potential here for gains to be made in exchanging Euro cash positions and moving into foreign benchmarks like the SPDR S&P 500 Trust ETF (NYSE:SPY).  If the ECB continues to pump more monetary stimulus into the economic, US assets should show gains, comparatively.  Going forward, it will be important to monitor the commentaries that are publicly released by ECB officials, as there is reason to believe that new stimulus programs could be outlined as early as next week.  

Chart Prices in the EUR/USD

(Chart Source:  CornerTrader)

Critical support in the 1.3630 area has now been broken in the EUR/USD, and for those forex traders that are using mostly technical analysis to form the basis of their trading decisions, this move has been significant.   For the most part, this forex pair has been in a strong uptrend this year but when we see breaks of support like the one that just occurred in the 1.3630 level, strong arguments can be made which say that the top is now in place.  If we see prices rise back above the mid 1.37 area, it would be a good sign that the bearish momentum is stalling.  1.35 is now the next level to watch on the downside, and will probably be tested sometime next month.