Euro Rally Has Run Its Course

 | Jun 07, 2013 | 2:30 PM EDT
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The euro currency has been a direct benefactor of a string of sluggish U.S. economic reports, but a pledge by European Central Bank (ECB) President Mario Draghi forced shorts out of the currency. In yesterday's ECB meeting, Draghi noted that there would be no reason to implement a negative eurozone deposit rate environment .

This gave a clear boost to the European currency, as traders are overly eager to react to interest rate differentials in this dismal yield environment.

Source: QST

In our view, the euro rally has likely run its course. We base this conclusion partly on our assumption that the market will eventually conclude that the dollar is backed by favorable fundamentals, although both economies are rather sluggish. However, more compelling than fundamentals, we feel that the euro has technically exhausted itself on this run during a time in which seasonal pressures tend to be dramatically bearish.

According to the Commodity Futures Trading Commission (CFTC), speculators of all sizes were net short coming into this week. In our estimation, most of those shorts were likely forced out in yesterday's nearly 200-tick surge, which left speculators somewhat neutral. In other words, this run was most likely propelled by short covering and could struggle to find real buyers going forward.

It isn't uncommon for the euro to see price declines of a dime or more during the month of May. This year, the currency managed to avoid the fallout but we have a feeling the seasonal move will end up being late, rather than absent. After all, the "normal" low in the euro is forged much later in the summer -- and that leaves plenty of room for a rough June.

Assuming our analysis is accurate, the euro could make a move below $1.29 and could possibly see prices as low as the mid-$1.27 level.

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