Bullish Euro Investors Exposed to Downside Risks
The EUR USD was under pressure from the start on Wednesday. Tuesday's loss following bullish news regarding a better than expected U.S. Consumer Confidence Report should have been the first clue that investor sentiment toward a stronger Euro was shifting.
Investors are now selling the EUR USD as they strip out the fear premium that was the catalyst for the recent run-up in the Euro and the sell-off in the U.S. Dollar. Last week traders bought the Euro as fear was spreading that the U.S. debt rating would be lowered from AAA. This week, the better than expected interest in the current Treasury auction is sending out a signal that the U.S. may maintain its current triple-A status. This news is helping to trigger liquidation in the Euro as traders remove the fear premium.
With the fear of a U.S. debt downgrade out of the way, EUR USD investors are now forced to look at current Euro Zone economic data and the picture is not pretty. Recent gains in the Euro have been funded on fear and optimism that a recovery in the U.S. economy would help other major nations recover more quickly from the current recession gripping the global economy. Based on this shift in trader sentiment, the Euro gained about 5% during the month of May as trader appetite for risk increased and the Dollar lost its glitter as a safe-haven currency.
This view of the Euro was dealt a blow on Wednesday as traders were encouraged to sell the Euro following bearish comments from European Central Bank member Erkki Liikanen. It was reported by the Finnish publication Kauppalehti that Liikanen said that the ECB's key lending rate of 1% is "appropriate" but that the rate could move lower if current economic conditions continue to deteriorate.
With the fear of a U.S. debt downgrade diminished, Euro investors may find themselves exposed to downside risk if the Euro Zone economy does not begin to show signs of recovery. This may lead investors to lighten up on current long positions or actually turn bearish on this currency. Based on Liikanen's comments, traders may have to build into the Euro price the possibility of another interest rate cut by the ECB at its next meeting on June 4.
Technically, the charts support the latter as a change in trend is not in the picture but the developing technical picture indicates that there is room to the downside. Based on the long-term range of 1.6039 to 1.2329, this market found resistance last week in front of a major 50% retracement price of this range at 1.4184. The two-day sell-off makes 1.4050 a new main top and indicates the start of a correction back to at least 1.3253.
Based on the current chart set-up, look for more downside pressure with a target of 1.3253. The developing bearish condition will change if the market regains 1.4184.