The EUR in 2017

In the last two days of 2016, the EUR attempted to break down below the 1.015 -1.0350 support zone and then late in the day proceeded to spike briefly over 1.0650 to end the year at 1.0527. This zone of support is important if you have a look at very LT charts (next chart below). A close under this level particularly if it occurs on a weekly basis would suggest another leg down to .9550-9650.  There is little support around 1.00 so a close below the support zone should  it occur  would result in a faster or more impulsive  leg down and coincide with  a pickup in short term volatility.  Generally the FX market is expecting a stronger dollar in 2017, but the range of outcomes is wide given the new levels of uncertainty posed by Trump,  Brexit,  and forthcoming European elections. A safe assumption about 2017 is that volatility in the EUR and CHF will pick up following two years of broad consolidative price action. If you have to weigh the uncertainty posed by the elections in Europe vs. the uncertainty of the Trump’s fiscal plans, the European situation will, in my view, weigh much more heavily on the short term price action. Longer term Trump’s Dollar policies will come into better focus. The new administrations fiscal policies may well be dollar supportive in the near term,  but that may well change quickly if protectionist policies are favored and we end up in a new currency 'cold war'. 

 EUR - Daily (Data prior to 1999 is synthesized from the D-mark)

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The last leg lower in the EUR from levels just over 1.2200 was a break out from the triangle formation going back to 2010 and so far the break in the triangle has only so far produced a move to the lows at 1.0350 area of support.  If you believe break outs from triangles suggest a move equal to the width of the triangle then the implication is that the EUR can move back to its all time lows under 90 cents. While many may find this an interesting observation or rule of thumb,  it is less useful as a trading tool. What is significant is that breakouts from these kinds of chart patterns are important and often are observed at major inflection points that can persist for many months and even years.  We are still in a Dollar bull market that now looks to be entering a new and perhaps final phase with the recent break of the consolidation pattern.  

Above is the price action of the EUR from its launch in 1999. As you can see it was at the end of 1999 that the EUR found support around 1.0150-1.0350. This support level proved difficult to crack until it finally gave way in 2000.

As you can see in the chart  above the EUR started the year around 1.0300 and finally traded through par and then fell to .9745 in the space of three days. Par then became top side resistance and when it failed to break over that level it once again quickly fell, within a week, to .9500. As volatility rises in 2017 we should see both medium term trend following and short term  counter-trend strategies start to perform. Both of these strategies generally have under performed during long periods of consolidation and range trading, but as volatility rise they should start to deliver with greater consistency. 

And on the upside, when the long term Dollar trend changed, the EUR once again found resistance at par, and getting thru the 1.0150-1.0350 zone proved difficult, but once it had cleared the long term EUR uptrend was able to resume. The period of consolidation prior to the break out was from approx July 02 - Dec 02, or roughly six months. 

What is surprising is that the dollar is not already much stronger. US-German interest rate spreads are at new all time highs. In France, Italy, and the Netherlands a number of  political parties are either hostile to the EU and the single currency or openly calling for its break up. The chart above illustrates, in another way the resilience of the EUR in the face of these pressures. In spite of LT momentum making a new cyclical lows the EUR continued its consolidation pattern from 2015 well into 2016. Momentum pressures declined returning nearly to flat and only recently now turning lower.  The 1.0150-1.0350 support zone has remained a tough area to break but once that barrier is overcome the downside momentum should accelerate quickly and the EUR should  remain under pressure in the lead up to the European elections.

James