The euro fell rather hard on Monday to reach down towards the 1.08 level. We have bounced significantly since then and ended up forming a bit of a hammer. The hammer of course is a bullish candlestick, and if we break above that candlestick, the theory is that we would reverse.
However, the market reversing does not necessarily mean that you need to be getting long of euros, just that the market is likely to bounce. A bounce from here will more than likely see plenty of resistance above, extending all the way to at least the 1.12 level. At the first signs of selling, it is very likely that the market will jump all over it.
When you look at the euro, the reason that we short it is not only based upon some type of breakdown, but also the fact that the interest rate differential between Germany and the United States is rather wide. It most certainly favors the US, so it in turn will favor the US dollar. The conflict in Ukraine of course helps the US dollar against the euro, as there will be a lot of concerns about the European Union and the strength of its economy. If war were to spill into the European Union, it obviously would be devastating.
Beyond that, the EU economy is not necessarily as strong as the American economy. If that is going to be the case, then it makes sense that we would see traders looking to jump into the US dollar, as it will probably be the best place to invest. It certainly looks as if people are looking to get involved in the bond market, which of course takes US dollars as well.
I believe that the 1.11 level is the beginning of significant resistance, extending all the way to the 1.12 level at the very least. I wiil sell any rally at this point in time that shows signs of exhaustion. If we break down below the 1.08 level, then I would also be a seller. This is a market that has absolutely nothing going on in its favor, so at this point I think the euro is almost certainly going to continue to go lower over the longer term.
