Euro Breaks Down from Rising Wedge

As long as the Federal Reserve has to remain tight, the US dollar will continue to appreciate.

The euro fell on Friday as the US dollar continues to act as a wrecking ball against almost everything. The interest rates in America came out much hotter than anticipated, so it does make quite a bit of sense that the US dollar continues to strengthen, as the Federal Reserve is likely to see a reason to tighten quite significantly. Ultimately, this pair has much further to go to the downside, and the trend is very much intact.

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The 50-day EMA has offered significant resistance over the last week or so, and now it looks like we are going to continue to drop down to the 1.04 level. Ultimately, anytime we rally at this point I think it will be looked at with suspicion, as we could see a lot of negativity. I think you should look for rallies as an opportunity to pick up “cheap US dollars”, as the euro is absolutely miserable at this point. In fact, the ECB tried to talk up interest rates on Thursday, which boosted the euro for about an hour.

By the time the market digested all of the information coming from Christine Lagarde, traders have decided that the ECB is behind the curve and is nowhere near catching up. Because of this, I think you are in a situation where you will see plenty of “sell the rally” type of attitude. In fact, I think that will continue to be the case through the rest of the summer, if not longer.

The 1.04 level will be the target eventually, and we may even get there rather quickly. If we break down below there, then it’s likely that we could go to the 1.02 level, possibly even down to parity which could be hit by the time we get to the end of summer. As for buying, I have no interest in doing so, but if we did break above the 1.09 level, I would have to reconsider the entirety of the trend. Above there, we have an opportunity to get to the 200-day EMA, but that seems nothing short of a dream scenario at this point. As long as the Federal Reserve has to remain tight, the US dollar will continue to appreciate. Pay attention to the bond market, as the yield differential will lead the way as well.