Many people believe that a Greek compromise between the EU and Greece is right around the corner, and it very well may be. Whether one is going to be finalized in the coming week or not, the EUR looks very vulnerable technically, and is probably going to be a good short regardless of the outcome.
If Greece eventually defaults and is shown the exit, or stays in the European Union with a parallel currency, or even stays in the EU with a new set of reforms and possible concessions, it really doesn’t matter. If you think about every one of those scenarios, the European Central Bank will probably have to stay defensive to promote price stability and confidence with ultra-low rates and extremely loose monetary policy for the foreseeable future. Ultimately, that will drive price action in the currency market and keep the EUR single currency pressured.
Below, we will take a longer term technical look at the EUR against most major currencies on the weekly charts:
EUR/AUD – Although the pair has seen some recent upside the last few weeks, the pair is trending lower.
EUR/CAD – The pair has been attempting to complete an inverted H&S pattern but has fallen short of the objective the last couple weeks. The downtrend line comes in near 1.4000 and is keeping a lid on price.
EUR/CHF – This currency pair is one of the more vulnerable currencies in the near term, in my opinion. If Greece and the EU can’t put some sort of “deal” together, a Greek default could lead to a massive rush into Swiss Francs for safety. Despite the hefty negative interest charged on deposits with the Swiss National Bank, most institutions, risk managers, banks, etc. won’t care about that in the near term to ensure the safety of their deposits.
EUR/GBP – With renewed beliefs that the BOE will be the central bank shortly after the FOMC to raise rates, the EUR/GBP looks as if we can push levels not seen since 2004 if the EUR continues to weaken.
EUR/JPY – The last couple weeks the EUR/JPY has stalled at the Golden Fibonacci ratio (61.8%) and has failed to rally past it (140.75) on a sustained basis. The pair looks vulnerable to a correction now.
EUR/NZD – The EUR/NZD sharp correction from 1.4000 has led a test of resistance at 1.6400 in just a couple of months! Mostly this was due to the RBNZ’s surprise rate cut. We can’t rule out further strength here and really is the one currency the EUR has had a lot of strength against recently. After a sharp rally like we have seen here, a likelihood of a correction is building.
EUR/USD – The pair has been bouncing in recent weeks as the positioning of USD longs and EUR shorts have been at extremes in recent months. As Marc Chandler of BBH noted this week, the EUR long positions “was the largest accumulation in a year, which itself was the biggest since January 2011.” The EUR looks like we could reach as high as 1.1640 (2005 lows) before turning lower. The setup would be similar to that of the EUR/GBP (flag pattern) which is a continuation pattern of the recent predominant trend.
So, in other words, if a Greek/EU deal does materialize in the coming week(s) I will be looking for the EUR to turn lower after a knee-jerk initial move higher.
There has been speculation recently that if Greece is forced out of the European Union, that the EUR would ultimately rally, The thought process would be if you remove the weakest country (Greece) the Union itself would be stronger as a whole and the EUR would turn higher as a result. Although long time listeners of my daily webinars knew this was an idea I had also subscribed to years ago when the EZ periphery first showed signs of trouble, I still think the “unknown” or fear of the potential fallout or contagion to other Eurozone countries would keep the EUR downside pressure initially before that could take place. Investors loathe fear and the unknown, so I suspect the EUR would stay under pressure until the market was absolutely sure the potential for contagion was contained.
Blake Morrow
Chief Currency Strategist, Wizetrade
Disclaimer: I do not have any exposure in the EUR. I will be looking to initiate EUR shorts in the coming sessions.
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