Charts: Kumo Cloud hangs ominously over the euro
A curious indicator predicting short-term moves shows the euro is stuck at a level that could indicate a fall
Major forex hedge fund managers have been predicting the demise of the euro for more than two years, expecting a descent back to parity with the greenback.
There have been occasional bouts with gravity, dating back to the Great Recession when the euro was knocked from its lofty perch of $1.60, but the lowest floor recorded was $1.18 back in 2010 when the debt crisis was peaking.
The single currency did stage a dramatic recovery, but, like Icarus, it fell from grace when positive economic fundamentals failed to materialize.
From that point forward, the euro has displayed what can best be described as erratic behavior. Economic fundamentals have remained tepid, but the euro has made repeated upward thrusts, buffeted primarily by rumors and overactive central bankers trying to make sense of it all.
The result has been a constant stream of downward trend channel formations, a sign that gravity is at work, if only on a gradual basis. The chart tells the story for the past two years.
No less than four major down trend channels are depicted on the diagram. The general trend can be discerned from the 100-Week EMA and the foreboding Kumo Cloud a curious indicator originating from the Ichimoku trading system that actually predicts near-term future prospects that hangs ominously over the euros every move.[In Japanese technical analysis trading method Ichimoku, Kumo Cloud edges identify current and potential future support and resistance points for the price; the thinner the cloud, the higher the possibility that the price will break through. The shape of the cloud is also important: upwards indicates bullish moves, downwards indicates bearish sentiment.]
Experts have not given up on their parity predictions, but when this condition will occur remains the open question.
What is going on behind the scenes to block gravity from forcing a lower valuation for the euro? Economic fundamentals do move currency markets, but neither Europe nor the United States are firing on all cylinders.
Europe, however, is lagging. Most member states are once again in recession. Unemployment is high, and GDP growth is sluggish. One might also posit that the political conundrum in the region is gradually diminishing investor confidence, another reason that supports the gradual slide over time.
In this new era of globalization, however, our various markets are interconnected as never before. Monetary policy in the States has diluted the greenback for the past 10 years in an effort to revive its economy.
As a consequence, foreign exchange reserve managers diversified their portfolio holdings to shift more share to the euro from dollars, while global capital flowed freely to emerging markets of the world, seeking higher returns.
Under these conditions, whenever there is a hint of progress in Europe or a rumor of a new crisis developing, for example in Cyprus, the market response is to repatriate funds back to the homeland, increasing demand for the euro and causing a temporary upward spike in rates.
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The latest consensus of members of the European Central Bank seems to suggest that a weaker euro may be the best remedy for persistent economic woes in the region.
Without favorable progress on the GDP growth front, these officials may finally witness more downward movement of the Euro down the latest trend channel formation.
- Tom Cleveland has been writing about investments and economics since 1980 and earned the title of investment analyst through his work with forextraders.com since 2009. For more on the euro, visit his website at www.forextraders.com.
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