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Has the Euro Found A Long-Term Bottom? . . .
When global equity markets hit a low in March of 2009 and began their resilient march back up, the Euro concurrently began its rapid march up from multi-year lows. And then Greece happened. When reports of a possible sovereign default began grabbing headlines in late 2009, the Euro, which had been performing wonderfully in 2009, began a steep descent versus the U.S. Dollar from a HI in November of 1.5135 to a low in May of 1.1876. Forex trading was the place to be for traders as price fell over 3,000 pips, or 30 cents, in less than 6 months.
Prior to this massive period of Euro selling, the Euro was performing so well through most of 2009 that financial analysts and economists began raising discussions on the possibility of the Euro even replacing or partially replacing the U.S. Dollar as the world reserve currency. The European Central Bank had enacted major stimulus measures during the Crisis of 2008, but nowhere near the measures instituted by the Federal Reserve in the U.S. Because of this, many economists believed the EuroZone would be able to emerge from the recession much further ahead of the U.S., who would now have to deal with massively ballooning deficits. However, things rarely go as expected in financial markets. After several quarters of seemingly positive growth in Europe, the Greek Debt Crisis began to unfold. And then, in just a few months, the bottom fell out and the market went from hailing the Euro as the next world reserve currency, to making a mad dash to get out Euros at all costs.
The ECB responded rather reluctantly to offering aid to Greece and other member countries facing the threat of sovereign default. However, once the measures were enacted and it was clear that EuroZone countries would not be allowed to default in the short-term, the market priced in a bottom and we have now seen a strong rally back up to the 1.2500 level on the Euro. Through the rally we have had some small retracements in price, but the Euro continues to post new HI’s on the EUR/USD Daily Chart. This is leading many trading professionals to raise the question: Have we found a long-term bottom in the Euro, or is this simply a retracement in a still bearish market?
This is a difficult question to answer clearly, but it is apparent that price is currently at a major breaking point. It is currently stalling just below the 23% Fibonacci retracement level of the our major swing down from November when the Greek Crisis began. In Technical Analysis, it is a commonly held belief in Fibonacci Trading that if a currency pair cannot retrace beyond the 23% level, then the current overall trend is very strong, and we will most likely see a trend continuation. So, the fact that the Euro is failing to break higher beyond the 1.2500 level with strong conviction may be a sign that we could see a fall in the near-term. The next fall will give traders a clearer picture of where the Euro may be headed throughout the rest of 2010.
Most large hedge funds and trading firms are still calling for lower levels on the Euro. Many reputable firms are even calling for the Euro to reach parity before the sovereign default scare in the EuroZone is finished. A key fundamental driver that could end this buying rally is if news begins to surface that strugge-line EuroZone countries are facing further fiscal and economic hardships. If the stimulus in Europe only serves to be a short-term “bandaid” price could begin to break much lower in the near-term.