EUR/USD: Break Of 1.35 Looks Imminent

EUR/USD:  Break Of 1.35 Looks Imminent

The US Dollar is once again making progress against its European counterpart as the EUR/USD forex pair is no clearly set on a test (and likely break) of the 1.35 level.  The PowerShares DB US Dollar Index Bullish ETF UUP is showing more bullish consistency than we have week in the last few weeks.  At this stage, it will be up to the central banks to determine the next real direction for these currencies, as we have started to see diverging policy stances when we compare the public comments that are being made by the Federal Reserve and the European Central Bank (ECB).

General optimism with respect to the ways that markets are trading as a whole has helped keep stock valuations healthy and we are now likely to see the SPDR S&P 500 Trust ETF SPY make some critical psychological resistance breaks of its own as the most commonly watched stock ETF is quickly closing in on the 200 mark.  Consumer spending is still strong and Americans are maintaining some of their best credit scores in recent memory. As is generally the case, bullish optimism in stocks translates to downside pressure on the precious metals space, and the SPDR Gold Trust ETF GLD and iShares Silver Trust ETF SLV have matched these historical expectations so far this week.  Moving ahead, macro stories will start to be influence by earning reported at tech companies, with some critical releases to come from Apple, Inc. AAPL and Google, Inc. GOOG.\

What’s Next For the Euro?

(Chart Source:  CornerTrader)

Looking at the chart above, we can see that the EUR/USD looks to be in a stage of bearish reversal once again, as the pair has has trouble making gains.  The failure at 1.40 looks to be the high point for the year, as Euro bulls have grown frustrated with another run at those highs.  Dollar strength against the Eurozone’s shared currency has yet to be matched on other currency pairs, however, and the JPY and GBP still remain somewhat elevated when compared to their averages for the year.  

Forex traders looking at things from an intraday time frame will likely be looking to establish new short positions in the Euro on any violation of 1.35.  Markets will start to view the shared currency differently if this level gives and stop losses from old long positions should increase the momentum once this occurs.  Because of this, we are unlikely to see the typical slowdown in summer volatility that is generally seen at this time of year.   What comes next for the Euro could be a very rocky time as the chances of added ECB stimulus remain a clear possibility.  Extreme unemployment in areas like Spain, Portugal, and Greece dampen the growth outlook for the Eurozone as a whole.

As long as interest rates stay low in the Eurozone, the Euro will remain low as well.  A sustained period of low interest rates suggests that forex traders will not have the added yield incentive to appropriately use the Euro in carry trades.  This means long term positions in the currency will continue to be reduced as long as the ECB maintains its weary outlook and reluctance to normalize policy.    The first sign this is happening will be seen if the EUR/USD does convincingly break 1.35.