In light of FED decision to cut interest rates by 0.50% we have witnessed farther weakness in USD. It was most visible in case of CAD and EUR. Canadian Dollar reached parity against it's southern counterpart for the first time in 30 years, while Euro reached an all time high of 1.4100 by the end of the week.
Immediately number of economists are predicting farther decline of USD, citing another rate cut during next FED meeting. This might or might not hold true. Certainly over last few years interest rates seem to have been a primary fundamental reason behind the currency trends. That, however, has not always been the case and might not be much longer.
Extremely strong Euro, especially against USD is not well received in Europe. It makes products from the Union to expensive comparing to their American equivalents. That will most certainly hurt exporters from the continent. Airbus, for one, has already voiced strong concerns and even came up with some numbers of how much more expensive it's getting for them to compete with Boeing. They claim to have no choice, but to outsource a lot work away from Eurozone.
This can not be well received by European politicians. French president, Sarkozy, already publicly called for European Central Bank (ECB) to take similar action. We can only expect this matter to become even more politically sensitive, with more pressure put on ECB to follow in FED footsteps. This should set precedence for other central banks, especially the likes of Australia and New Zealand, which have been expressing concerns over lofty levels of their respective currencies.
Interest rates can easily become secondary fundamental reasons behind Forex trends. Perhaps international trade issues will be the driving factors, like they were in the past. Internal fiscal policies or strength of economies can become primary focus points for fundamental traders. Who knows, perhaps job creation data will be causing the most movements. That, however, will be know only from the perspective of time.
There are also technical factors suggesting possible reversal in EUR-USD trend. If we look at extremely long term charts, we can see that 1.4500 level has proven to be a formidable resistance level before. We must clarify something here. While 1.4100 level is the all time high for Euro, that is only since Euro inception. Prices for the period before common currency was introduced, can be extrapolated by using the old German mark as a proxy. Those charts are readily available.
Looking at monthly charts of (Euro/Mark)-USD, we can see what happened when prices reached 1.4500 level in 1980 and 1992. Both times there was a reversal. Strong one at that. Some most common technical indicators, like MACD, are also pointing to some kind of pull back. Others, like cycles and price swing analysis agree as well.
Neither one of those reasons mentioned above is, by itself, compelling enough to call the end of EUR-USD rally. That said, the confluence of both fundamental and technical reasons at the same time is strongly suggestive that we are close to an important turning point in the market. Taking all that into consideration, how should we call it? EUR-USD at 1.2000 within a year? Certainly not out of the question.
Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on http://www.spectrumforex.com . Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com
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