The euro initially tried to rally against the US dollar during Monday trading, but gave back almost all of the gains in yet another sign of weakness. Monday was Independence Day in the United States, so obviously volume was a major issue. The fact that the euro could not capitalize on the lack of American trading probably says more than I ever could about the overall direction of this market.
Bond yields in America continue to climb and outperform the European Union. Because of this, the pair is more likely than not to continue going lower. I will continue to fade rallies, as I see so much in the way of noise above. The 1.06 level looks to be extraordinarily resistive, while the 1.08 level is essentially the “ceiling in the market” at the moment. We would have to break through all of that for me to start to explore the idea of a trend change.
On the downside, the market clearly has been negative for some time, and we have broken through the bottom of the 1.04 level couple of times, so if we were to make a “lower low”, that would be nothing but negative for the euro going forward. I do believe this will happen given enough time, with the euro looking to reach the 1.02 level, followed by the parity level sometime later this summer. With the ECB doing everything it can to keep the economy limping along, it’s very unlikely they will be able to do more than a token interest rate hike or two. At this point, the consensus is that they may do 50 basis points. On the other side of the equation, you have the Federal Reserve which hass already promised yet another 100 basis point rate hike, so it will continue to make US bonds much more attractive, most certainly above the European Union.
Ultimately, the direction of this pair is probably in the hands of the Federal Reserve than anybody else, but we also have external factors such as the war in Ukraine, the lack of energy in Europe, and the fact that there is such a huge dichotomy between all of the member states as far as where they are economically. With that in mind, it’s difficult to get bullish on this pair anytime soon.
