The much talked of level for the Euro
of parity with the US dollar has not materialised – yet. Although the EURUSD pair
seemed to be in free fall since the end of February, a tendency that gathered
momentum after the start proper of Eurozone Quantitative Easing, this was
firmly checked by the tone of the most recent US Federal Open market Committee
(FOMC) monetary policy statement on Wednesday of last week.
There was a marked reversal in the
pair at that point. Now it seems to be marking time, using the 25 day
Exponential Moving Average (EMA) as a resistance (see chart). Most EMAs are important,
but the 25 period would not have the same significance as the 100, which we
often refer to here.
Will
it last?
So what has happened? The most likely
explanation is that what we have seen in the second half of last week is a bout
of short covering. The Single Currency was considerably oversold coming into
the FOMC meeting (a strong preponderance of traders held short positions). Anything
other than an unambiguous indication on the part of the Fed that interest rates
in the US were to be raised was calculated to cause marked nervousness in
regard to these positions. What we actually got from the FOMC was an equivocal announcement
which, even though the phrasing matched hawkish expectations (the word ‘patient’
was removed), the overall serving was a dish of dovish composition, with a side
order of uncertainty.
So short Euro positions were unwound,
leading to the bounce we saw. But QE in the Eurozone is still very much in play
and the Fed will tighten, at worst in the medium term. The likelihood is that
traders can look to see normal service resume before too long.
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