Monday, March 23, 2015

Euro rebounds from its drive to US dollar parity | Will it last?

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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