By: Brandon Rowley
At the beginning of the month, I speculated that a strong move in the euro could fuel a year-end equity market rally. The $1.50 level in the EUR/USD was an important psychological resistance level and proved to be insurmountable ending the euro’s rally for the short-term. The euro took a hit from the surprise Dubai debt news but quickly bounced back indicating that it may be ready to breakout. Alas, that did not happen.
Ratings downgrades of the Baltic States and Greece’s debt problems wreaked havoc on the currency in the last couple weeks. The EUR/USD collapsed $0.08 just this month. This has fueled the surge in the dollar with the DXY gaining over 4% in December so far. The bounce in the dollar has had its predictable impacts on other markets with commodities selling off and equity markets struggling to break higher out of recent consolidations (although the Nasdaq broke out yesterday).
The beauty of technical analysis is that it can be applied to any market. It was rather simple to judge that $1.50 was a major inflection point and volatility was likely to increase around that area. My speculation that a long trade would occur certainly did not play out but the risk was tight against the rising trendline and flipping short was even a possibility.
Now, we see the EUR/USD falling into a support level at $1.40-$1.42. I am not looking long the currency but I am watching it closely for its implications on the dollar generally and gold and equity markets. Stabilization of the euro will cause a likewise stalling in the DXY bounce and tie into a possible breakout in the S&P 500 and a bounce in gold prices. Markets are all interconnected and a primary driver of major US-priced assets is the euro’s current weakness.