Monday, February 25, 2013

Has the US dollar come to the end of weakness?

In mid 2008 the Euro hit its highest point against the US dollar since the birth of the Euro, and in modern times if the German D-mark is taken as a proxy for the Euro prior to its inception. 

The high in 2008 was in response to the Great Financial Crisis and the steps being taken by the Federal Reserve and others to contain it, with fluctuations after that which happened as a result of the sovereign crises in certain countries in the Euro zone, most notably Greece. 

Since the high of mid-2008 the EURUSD pair has respected a declining triangular pattern, or in technical terms a pennant, between a well defined upper trend line and its 200 monthly period Simple Moving Average (SMA) (see chart above). 

There are indications now that the pair will fall from here, which are both technical and fundamental. Technically, this pennant is signalling a short trade, as its upper trend line is falling in a significant manner. Fundamentally, two notable things have happened: The USA is about to become, once again, self-sufficient in oil, due to developments in shale oil extraction and “fracking” technology, and the Federal Reserve has given its strongest hint yet, at the release of its most recent minutes, that Quantitative Easing will be a thing of the past in the not-too-distant future. In Europe, the European Central Bank (ECB) former policy of relatively high interest rates seems to have been abandoned, at least for now, in response to less than glowing indications about European growth. All of these things are bullish for the buck, and bearish for the Euro. 

Is it a case of watch out below for the EURUSD?

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