From the November 01, 2012 issue of Futures Magazine • Subscribe!

Euro at cyclical crossroads

Forex Trader

About this time last year, we made the case against the euro based on a required extension in the currency’s cycles. As “Time to reverse?” shows, the euro has had three major down cycles and two major up cycles since the summer of 2008:  -23% from July to October 2008; -21% from November 2009 to June 2010 and -19% from May to July 2012. 

Is the euro now ready for a rising cycle? There are technical and fundamental factors that lead us to believe EUR/USD is at the start of a secular bull move. 

The EUR/USD not only has held consistently above its 200-month simple moving average, but also rebounded right off the key monthly moving average. The 200-month simple moving average can be powerful when it reconciles with cycle turnarounds. Over the last nine years EUR/USD has held consistently above its 200-month simple moving average. 

Since 2003, EUR/USD tested, without breaking, its 200-month SMA on three occasions:  November/December 2005, June 2010 and August 2012.

Nov/Dec 2005: The European Central Bank (ECB) began a three-year tightening campaign. Six months later, the Fed halted its tightening cycle. The diverging interest policies were a significant boost for the euro. EUR/USD rallied 37% in the subsequent three years. 

June 2010: The euro’s bottom coincided with chatter of a second round of quantitative easing (QE2) by the Fed, Beijing pronouncements about purchasing Eurozone bonds and stabilization of Spanish unemployment. EUR/USD went on to rally 25% for 11 months. 

August 2012: Euro bottomed on ECB verbal/operational support for Eurozone and the Fed’s QE3. After the August bottom, EUR/USD rallied more than 10%. 

Another remarkable feature of the EUR/USD rebound is the rare monthly reversal occurring in September. The rebound is a reversal of a 16-month downtrend. Combining major trendline reversals with key moving averages underlines the case for a potentially solid secular bull market in the euro against the U.S. dollar. 

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