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A breakdown seems more likely than not, perhaps a move to the 1.06 level, followed by a move to the 1.04 level.
The euro tried to break above the crucial 1.08 level on Tuesday but has been found wanting again. Because of this, it looks as if the 1.08 level will continue to be a major problem for the bulls, and it would be a bit surprising to see this market break above there. At this point, it’s obvious that we do not have enough momentum to make that move.
It might be worth noting that the 50-day EMA is in this current region, suggesting that we are going to continue to see a lot of noisy behavior. That being said, when you look at the longer-term chart it is obvious that we have been in a downtrend, and none of the fundamental reasons have changed, although Christine Lagarde has suggested that 25 basis point rate hikes could be coming. That being said, the European Union is still far behind the Federal Reserve when it comes to monetary tightening, so I think we still have a huge advantage for the US dollar.
Furthermore, you have to keep in mind that as risks continue to pile up out there, people will want to own US dollars. There are serious issues in emerging markets right now with debt that is denominated in greenbacks. It is a bit of a death spiral just waiting to happen. Because of this, a breakdown seems more likely than not, perhaps a move to the 1.06 level, followed by a move to the 1.04 level. In fact, I think sooner or later we may even test parity if economic conditions start to deteriorate again.
Alternatively, if we were to turn around and break above the 1.09 level, then I think you could see an even bigger rally to the 1.12 level, but that is going to take quite a bit of effort to make happen, and we would more likely than not see US dollar weakness across the board in that scenario. Because of this, I think it is easier to fade rallies as they occur, and we certainly saw a lot of that early on Tuesday. While we have not broken down significantly, the ferocity of the selloff at one point was a bit concerning.
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