The euro rallied again on Monday, but we are still significantly below a major resistance barrier. The 1.08 level is an area where I would expect to see quite a bit of resistance, as we had sold off so drastically from that region lately. Yes, Christine Lagarde has recently stated that there should be several 25 basis point hikes coming from the ECB, but at the end of the day, they are still not as hawkish as the Federal Reserve.
Furthermore, you need to keep in mind that the general “risk-off attitude” of traders around the world will continue to drive more money into the US dollar. The bond markets are starting to see falling yields in America, but eventually, you will start to see a shift as people will focus on the demand for bonds. That of course requires US dollars. I would also point out that Monday was Memorial Day, which is a major holiday in the United States and therefore most traders will not have been part of the action.
If we were to break above the 1.09 level, then it’s time to start focusing on what the market is doing, not what it “should do.” At that point, we may have seen the bottom of the euro, but I think we have a lot of work to do before that happens. The European economy continues to struggle, and although inflation is picking up, the reality is that growth will be slow for the Europeans, so over the longer term the euro should continue to be soft. If you really choose to buy the euro, you may wish to buy it against other currencies, not the greenback.
The US dollar was overbought for quite some time, so the fact that we started to see the greenback sell off should not be a huge surprise. After all, nothing goes straight up in the air forever. If we get some type of significant negativity in this market, it will more than likely kick off US dollar buying across multiple markets in the Forex realm, and it becomes a bit of a self-fulfilling cycle. Underneath, if we were to break below the 1.06 level, it opens up a move down to the lows again, nearly 1.04 level. Expect choppiness, but I’m still looking for an opportunity to get short.