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Wednesday 6 April 2011

Peeling the EURUSD onion

I've been meaning to do a dedicated post on EURUSD for a few days but have been struggling to find the time. Given that EURUSD has now reached a critical test in the 1.428 - 1.43 area overnight however, it will wait no longer, so I'm doing this as a second post before the open today. All charts were prepared last weekend but the technical situation hasn't changed much other than the small move up into the key test that I've been expecting.

In the short term, EURUSD is within a rising wedge. That's bearish though it would be much more bearish if the upper trendline for a break up to evolve into a rising channel hadn't already been established. There's a similar rising wedge on AUDUSD with resistance now in the 1.05 area. As with EURUSD, AUDUSD is still well short of testing the upper wedge trendline:
The context for the current rising wedge is within a greater rising channel from the summer lows last year:
The reason the 1.428 - 1.43 level is interesting however is because of declining resistance from the all time high on the 5 year chart. That trendline is the resistance trendline on a (bullish) falling wedge indicating to the 1.60 area on a break up. If wedge resistance holds on the current move up then there is a technical target in the 1.10 for a move down on EURUSD here, though for reasons that become obvious on the next chart, it seems unlikely that EURUSD could make that downside target:
To get the true big picture on EURUSD though, we have to look back into the 1990s, where the support trendline on EURUSD that first hit in 2002 is matched by an upper channel trendline dating back to 1997. The sharper eyed observers among you will note that the Euro was only launched in 1999, but the currency mix within the Euro was already long established, and the chart therefore goes back before the launch.
The current area is key because of the five year falling wedge and declining resistance from the 2008 high, and a break above will look extremely bullish to my eye. If EURUSD breaks above the falling wedge then the shorter term rising wedge is the pattern to watch for long entries, but the overall picture will be looking towards first a test of the all time high just over 1.60, then a break above to channel resistance in the 1.75 to 1.85 area over a likely timescale of the next one to three years.

As I'm writing EURUSD is trading slightly over 1.43, but I'm waiting to see a break of 1.43 with confidence and the daily close.  If we see that break then rising wedge resistance should be hit next in the 1.4375 - 1.439 area, and that could well be an important short term high, though I'd then be inclined to buy any dips on EURUSD on the longer term picture.

Will EURUSD reverse here? It may well. EURUSD made the last major high in November 2009, four months before the end of QE1, so the timing looks promising. We could well see an important high here followed by a several month retracement into the announcement of QE3, just as we saw last year.  The DX chart is looking promising for a reversal, though a conviction break below support would negate the current bullish setup:
I'll be watching for that retracement, but it's hard to be optimistic about the US dollar's longer term prospects here. Dollar bulls are fighting the Fed in just the same way that equity bears are fighting the Fed. The Fed's strategy is to flood the world with newly printed dollars to create strong asset inflation. It's hard to argue with the results of that strategy so far, and the laws of supply and demand argue for a big fall in the value of the US dollar in response. That large rising channel shows the likely shape of that decline in my view, and if EURUSD reverses here I'll be watching carefully to identify the next big low, which should be a good multi-year long play.

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