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Foreign Exchange

Technical fault: why the euro won’t trade lower

One of the most common questions asked in the past week is why the euro has not fallen off a cliff, given that it faces the biggest challenge since its creation.

When plans are being drawn up for the withdrawal and/or ejection of eurozone member states, surely the single currency should be plummeting towards parity against the dollar? From a technical point of view, the euro’s resilience is fairly easy to understand.

Three times this week, the single currency has failed to break decisively through $1.3430 against the dollar.

Is this a function of the much-vaunted Asian demand theory or merely a reflection of markets positioning?

The latter, says Alan Collins, technical analyst at PIA.

Collins says $1.3422 is a crucial pivot in EURUSD and the fact it is struggling to break through to the downside is not a surprise.

“Sometimes it can take a week for the market to break through such a significant level,” he says. “Currencies are never a one-way street. Bear in mind EURUSD hasn’t notched up a losing streak of three days since September.”

 EURUSD (15/11/11 - 17/11/11)
 
 Source: MetaTrader Charts

According to Collins, the easiest thing to do for investors sitting on a short position in EURUSD as it approaches $ 1.3440 is to take some profit – thus the resilience we have witnessed this week. He says all technical indicators point to further losses for EURUSD, however, with an eventual break lower making a short-term target of $1.3343 a given, and opening up the way for a test of the October low at $1.3146.

For those looking for a more fundamental theory as to why the euro is holding up so well, there are plenty of theories.

HSBC’s global head of FX research David Bloom says there are two main reasons why the euro is more likely to rise than fall in the coming months.

He says the euro’s resilience reflects the fact that while some eurozone countries face problems with deficits, the region as a whole has a strong external balance.

In addition, he believes it is in the interest of all eurozone countries to find a lasting resolution to the region’s debt crisis.

“A gradual move towards a resolution is the most likely outcome, and as the news flow becomes less negative, then the euro is more likely to rise than fall in coming months,” says Bloom.

In the short term, there seems little sign that European politicians are getting ahead of the curve and putting the brakes on the slow motion train wreck that is the eurozone debt crisis.

That October low in EURUSD would appear to be there for the taking.

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