Will the Euro Hit a Wall?

 | May 17, 2017 | 2:00 PM EDT
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(This commentary originally appeared on Real Money Pro at 11:50 a.m. ET today. Click here to learn about this dynamic market information service for active traders.)

In mid-March, we wrote about the potential strength of the euro due to seasonal and technical pressures. However, we are here to warn you of the opposite scenario. The seasonal strength in the euro generally tapers in early to mid-May and the chart is suggesting that most of the buying has probably exhausted itself. Also, fundamentals backing both the euro and the greenback appear to be overpriced at the moment. After all, the dollar is collapsing in the face of a steady interest rate hike campaign by the Fed and the euro is soaring on stable but less-than-stellar economic data. Thus, it seems reasonable to expect the euro currency to retreat into correction mode in the coming weeks or months.

Our friends at MRCI provide seasonal charts compiled over the past 30 years. According to the data, the euro has a strong tendency to find an intermediate-term top following an early May rally. Of course, we understand that seasonal tendencies are far from a guarantee, but it is worth noting that the upside in the euro is far less uncertain going forward.

June Euro Historical Patterns

The daily chart of the euro futures market suggests something similar. The currency has enjoyed a sharp rally in recent sessions, but gains from here will be much more difficult to achieve. In our view, it would take another political shakeup or severe change in fundamentals to justify a break above the $1.1150/$1.1200 area in the June futures contract. This area represents the current trading range resistance for the euro and is also the point at which oscillators become overly saturated. For instance, the RSI has climbed above 70 for the first time in years and the Williams %R is near maxing out with a reading of 99 out of 100. Can the euro go higher from here? Certainly, but it isn't likely.

Is the Euro Running Into Resistance?

Our best guess is that the euro will fall back into its trading range to eventually test support near $107.50, which would also fill a gap left in April. You've probably read that chart gaps are almost always filled. I can attest this is true; however, this knowledge isn't as helpful as it might seem. Some gaps take months, or even years, to fill and some never do. Nevertheless, if a market begins trending toward a gap, the gap itself can act like a magnet to price.

If we are wrong about the $1.1200 area holding, the next area of resistance won't come into play until $1.1450; accordingly, anybody wishing to play the downside in the euro must account for this possibility. On the flip side, if the euro does make its way to the $1.0800/$1.0750 area again, it should be a relatively high probability entry for the bulls.



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