The EUR/USD pair went back and forth during the session on Monday, essentially settling nothing. This market could be looked at in several different ways, but I’m choosing to look at it from a longer-term perspective. The red downtrend line on the chart is from a monthly down trending channel, which started back and the height of the financial crisis. In other words, this is a very significant resistance area. It is because of that I find it so interesting that we are just sitting in this general vicinity. On one hand, you could say that we are expecting some type of breakdown here, but on the other you can also mention the fact that the market seems to be fairly content just hanging about the area. That inning of itself is a very bullish move, simply because we are not moving.
The interest-rate differential between the two currencies still favors the Euro, and last week we had the European Central Bank reiterate the fact that it was not prepared to do anything as far as loosening monetary policy anytime soon. That of course is a very bullish thing for the Euro, even though the Federal Reserve is in fact tightening monetary policy by tapering off of quantitative easing. Simply put, the interest-rate differential between the two currencies should continue to be in favor of Europe for the foreseeable future.
However, at the end of the day all I do is follow the market, not the rationale. In other words, if this market breaks down, I have to start selling. One thing that many of the Forex traders I talked to forget is that the markets will do whatever it is they want to do. There is no “should”, and as a result sometimes it moves in ways that you do not understand. However, I recognize that the 1.38 level is massively supportive. So we really need to break down well below that in order for me to start selling. If we do though, we should in theory continue the downward channel. Either way, I’m on the sidelines but expecting a significant move fairly soon.