In business circles, Europeans have often characterized their region of the world as a fickle maiden with many suitors, never quite sure which one to pick and quite clever in never revealing her true intentions. This same characterization can easily be applied to the Euro, as well. Foreign exchange reserve managers and investors have chased after the fickle “EUR/USD” currency pair, thereby buoying its confidence, but the constant attention rarely meets with a satisfactory conclusion. The Euro continues to bounce from one direction to the next, never revealing its true intentions.
Occasionally, however, a fork appears in the road, an obstacle that cannot be ignored and must be addressed. Such a situation exists at present. The Euro is stuck, a technical term that defies definition. Analysts are betwixt and between when it comes to the next moves in the market, but that does not deter them from making bold forecasts for both the near and long-term horizons. If you are looking for convergence in their linear thinking, you will not find it.
The following chart illustrates the current confusion that exists for what’s next:
Depending on which analysis you read, the Euro is either progressing in a tight range or ascending a new recovery channel. Each path is designated with dotted-green lines on the 4-Hour chart for the “EUR/USD” pair. The portion of the market that believes that the Euro is ranging is quick to point out that the abundance of short positions almost dictates another leg down. The ECB’s latest attempt at QE will certainly dilute the Euro, putting more downward pressure on it during this brief period of consolidation.
Those on the opposite side of the fence point to the technical data. The Stochastics are rising, and volatility has generally picked up before a rush to higher levels, an old maxim in the trading community. The Euro has broken through resistance at 1.2470 and managed to peak above the repressive Kumo Cloud, if only to be blocked momentarily by the 100-4Hr EMA. For these optimists, history is in their favor, since forex reserve managers and investors have a lot riding on the value of the common currency.
The market power of this group has consistently come to the Euro’s rescue in the past, but 2014 has witnessed increased hesitation on this front, perhaps due to the persistence of unaddressed structural reforms and the lack of positive economic data for the region. Traders that followed a shorting strategy, however, have been burned before, but they may now finally have a real opportunity to recover their prior losses.
What are major banks forecasting for the Euro? BNP Paribas and UBS have updated their forecasts, based on the current situation. Both teams are more concerned about the obvious divergence of U.S. monetary policy and the rest of the world. If 2014 was to be the “Year of the Dollar”, then 2015 and 2016 will both be more of the same. BNPP does not buy into the channel theory. They continue to hold their short position with an ongoing target of 1.18.
UBS takes a more optimistic stance, setting 1.23, 1.25, and 1.20 for their predictions for one-month, 30-days, and 2015, respectively. Their explanation reads as follows, “We concur with the consensus view that the dollar will enjoy healthy gains in 2015 and beyond, but the path is potentially dynamic given that dollar strength could yield both benign and disruptive outcomes, depending on what’s driving it.” Mario Draghi also remains committed “to use additional unconventional measures to reach targets”, i.e., a weaker Euro.
If the Euro penetrates 1.2470, it may be time to short.