Down But Not Out: When Will the EUR/USD Drop?

Last week the price of the EUR/USD triggered our trade, but ended on a slight loss showing for the week. You should still be in this trade as the stop loss has not been triggered yet. While at times the value of the EUR/USD seems to defy the news reports surrounding it, the news continues to point to a stronger US economy. There is still every reason to believe that the EUR/USD will drop. The good news for the US is not only better than the good news for Europe, but it is also more substantive. Europe’s good news is much less exciting, like mentioning a bond sale or Greece agreeing to austerity measures.

The United States is showing steady job growth, a stronger housing market, and better debt-to-income ratio per household. Comparing the economic reports of these two economies makes it clear that the US is surging ahead. The smart money is that the EUR/USD is going to have to follow this trend soon after attempting to buck it for so long.

The United States economy continues to improve

The positive reports for the US economy keep rolling in. For the third month in a row over 200,000 new jobs were created in the states. This is also the third month in a row that those numbers have exceeded expectations and the first time in years to break 200,000 for three straight months.  Friday’s numbers showed that despite raised expectations, economists might still be underestimating the strength of the US recovery.

The amount of consumer credit being used also went up. While this might not be a huge deal in and of itself, the report indicates further confidence in the recovery. This is resulting in more spending and retail which will only continue to help the US economic recovery. The consumer confidence reports clearly show that the US public is strongly buying into the positive numbers.  These upticks seem to be feeding off each other to strengthen a recovery already gaining plenty of momentum on its own.

Oil prices appear to be increasing based on the assumption that demand will go up as the United States economic recovery continues to recover. While some economists worry this could damper the recovery, there are many others who do not believe this is the case. Then there is also the valid argument of higher oil prices being far more detrimental to Europe than they would be to the US economy.

When you look at three straight months of strong US reports it is hard to see anything other than a continuing positive trend. Put in all the uncertainty that still surrounds Europe and the smart bet long term is still on the USD.

What’s going on in Europe?

The EUR is a difficult currency to figure out right now. Many economists believe it overvalued. But that is not a consensus point of view. Some argue that the Euro has been beaten down and any good news should affect the currency accordingly. Yet another group argues that many traders are boosting up the Euro by anticipating a full economic and jobs recovery – artificially factoring those things in without any evidence they are going to happen. In other words, the various arguments among economists and traders about the EUR mirrors much of the confusion surrounding this currency right now. It reaches an entirely different level when trying to figure out what is actually already priced into the value as opposed to what is not.

While there are some good news reports coming from Europe to boost hopes for the EUR, they still do not compare to the caliber of reports from the States. This week the boost in Europe seems to be coming from a couple sources. First, the success of the Greek bond swap is giving encouragement that the entire debt mess is behind them. Being able to finally put away the debt demons would be a huge benefit to the Euro-Zone as a whole. This might be the most important hurdle to get out of the way for a full European recovery. It is important to note that even if the Greece issue is settled for now, that is still a long way from settling all of Europe’s debt problems.

The major tangible report from this week that has given a noticeable boost to the Euro-Zone’s economy is Germany’s strong construction reports. This rebound gives some hope that there might be a surge of recovery going on. The optimists even hope this could prevent the upcoming recession that more and more economists are gloomily predicting might be around the corner for Europe.

The European Central Bank does not seem convinced. Their public statements have made clear that the expectation is for the Euro-Zone to double dip back into recession towards the middle of this year. That certainly is not the type of news that should make for a strong currency.

What’s this all mean?

As long as our stop loss is not triggered we want to stay in this trade. The good news from Europe is not nearly the same caliber as yet another surprisingly positive month from the United States. We are going to stay in this trade as we still expect the EUR/USD to drop.

We have three different trades that we are looking at: two shorter term trades and the one long term trade that is currently open. We have a long term short at 1.2943 risking 1.3450 with a take profit at 1.2643.

We have two short term trades. We have a pending buy at 1.3293 risking 1.3263 with a take profit at 1.3303. We have a pending sell at 1.3094 risking 1.3124 with a take profit at 1.3084.

Good investing,

Jason Fielder

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