Three Reasons Why the Euro is Going Back to 1.45

Illustration: Euro
This is a guest post by Simit Patel

At the time of this writing — February 2012 — the Euro is trading at around 1.31. Though it may seem unlikely now, here are three reasons to believe EURUSD is headed back to 1.45 in the years to come.

Euro Bulls are Defending 1.28. As the monthly chart below illustrates, 1.28 has historically been a support/resistance zone — meaning a focal point where strong buyers/sellers capable of pushing the market step in. On top of that, technical analysts will observe that it is around the 38.2% retracement level of the big move up from the Euro’s inception in 2001 to its 2008 highs past 1.60 while also being around where the 200 month exponential moving average is. The fact that these technical indicators are all finding themselves in roughly the same price zone tells us that there is a “price wall” of sorts; it will be tough for sellers to push through this zone, as those who have been short sellers for a while will look to take profits, while speculative buyers will feel comfortable jumping in here.

EURUSD Analysis

The Dollar Woes Are Still There. While the problems with the Eurozone were a focal point of the global economy in 2011, it’s worth noting that the problems with the dollar are still there and are growing worse. Specifically, the US economy is still running both budget and trade deficits (key factors, as we note in our forex course), has persistent unemployment and rising food prices, and is experiencing on continued increases in the money supply. To put it simply: while the Euro has problems, so does the dollar — and I’d argue the dollar’s problems are larger in the long run, as the US economy bears a greater debt burden. This may help explain why in spite of all the hooplah about the demise of the Euro, the EURUSD exchange rate was barely able to break below 1.30 in 2011.

The Trend is Still Up. Last but certainly not least is a casual observation of the trend: as can be seen in the chart above, a 45 degree trendline can be drawn from the lows in 2001 to where we are now. As forex educator and coach Peter Bain reminds us, the trend is your friend: it’s advantageous to trade in the direction of the trend that is clear and present.

For these reasons, I think it is likely that the EURUSD exchange rate will go higher, re-visiting 1.45 at least and possibly going to new highs.

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