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Technicals for U.S. Dollar and Euro Currency

12/01/2010

Over the past several days, I have received numerous requests to identify how deep the current selloff in the euro could be.

Let me first state that, as is usually the case in November, a U.S. dollar peak or trough for the year is established.  I believe that occurred again this year with the U.S. dollar 75.631 low on November 4. What has occurred since is that the euro has resumed its bearish momentum from earlier this year, trading, in fact, below its 200 day moving average.  As you can see in the chart below, the euro "respects" the 200 day very well.  The U.S. dollar has yet to trade above its 200 day moving average at 81.777. 

Obviously, the euro zone debt contagion fears are fueling the selloff. However, I believe fundamentally the surprising improvement in recent U.S. economic data is also supporting the appreciation in the dollar. 

So what happens next?

The euro currency mid-August/early September support range at 1.2588 to 1.2919 is critical.  In essence, this range "protects" the recovery from early June.  A violation below 1.2588 suggests the potential to retest the June 7 low 1.1877.  I prefer that it does not even test the top of that range @ 1.2919 if, in fact, the euro is to stabilize the November decline.  The deeper it digs into the range, the more likely it is to break below 1.2588.

Overall, I would suspect that for the remainder of 2010, rallies in the euro will meet selling pressure and dips in the U.S dollar will be supported with some buying interest.  The optimal scenario is stabilization and some "sideways" trading in each currency through year's end.

Euro Currency

Source: Bloomberg


U.S. Dollar

Source: Bloomberg

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