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It has been interesting over the past few years to watch the battle between the Euro and the US Dollar. Both currencies have had significant difficulties to overcome (and doubtless have more ahead of them), yet traders and investors seem to change their minds quite frequently about which is actually in worse shape.
Let’s take a look at the Euro against the US Dollar (FXEUUS in ProfitSource) in Chart 1 below. For those unfamiliar with currencies, this chart represents the value of one Euro in terms of US Dollars. At time of writing, one Euro buys approximately $US1.42. Chart 1
click to enlarge
We can see that over the past year, the value of the Euro has been steadily increasing against the US Dollar. Whether this is justified or sustainable remains to be seen.
A brief look at the fundamentals of the two currencies would suggest the US Dollar has the harder road back, but it is not always fundamentals that drive the markets, especially in the short-term.
The US has a long history of fighting back and recovering and the US economy is well known for being incredibly robust. I believe Americans will rally, get behind their currency and do whatever has to be done to support the greenback.
Circumstances are different in Europe where the Euro is the currency of many countries, not all of which are struggling.
While all countries in the Euro-zone want the best for the currency in the long-term, their vastly different economic positions could play a part in what happens next with the Euro. Will a country like Germany, probably the best-placed of the Euro countries, be willing to make sacrifices to prop up weaker economies like Greece and Ireland and thereby support the currency?
It will be interesting to see whether the US (a single, united country, though probably in a weaker position) can match, if not beat the Euro-zone (politically divided yet potentially stronger). We have seen many times on the sporting field a united team of ‘weaker’ players overcome a ‘stronger’ team that shows disunity.
Whatever happens, the price charts will be our best guide as to what happens next.
Chart 2 below shows the weekly swing of the Euro against the US Dollar (FXEUUS in ProfitSource). Chart 2
click to enlarge
Note that the Euro has now made a lower swing bottom compared to the previous weekly swing bottom. The trend of this chart is no longer up, but uncertain.
Keep in mind that this is not an automatic sell signal, rather it is a warning signal that perhaps the trend is about to change. For the trend to turn down, we would need to see a lower swing top. For a lower swing top to occur, the Euro must push higher first, so caution is advised. WD Gann wrote that the safest place to sell is the first lower swing top, which may be approaching.
The current downswing is well and truly larger than the previous downswing, so a contracting upswing would be a strong sign that the Euro has some downside movement ahead. Follow the swing chart!
Be Prepared!
Mathew Barnes
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