EURUSD technical mid-term outlook – the shopping season is over

US goods were exceptionally cheap for non-US citizens for a year but that is over for the next 1-2 years at least. On the left hand, we have the weekly EURUSD chart with a clear breach of a long-term trend at 1.38. Now our medium-term target is first 1.31 (38% retracement) but that’s only a short breather at best. The real support and challenge for this downtrend is 1.22 (50% retracement) medium-term. From a pattern perspective, we have to drop 25 points, which puts us at 1.12 (61.8%), which is the target within 6-9 months.

The fundamental problem here is that the Europeans get a double hit. The US crisis cost them painfully and now they have to face their own crisis as well. Further negative bias comes from the fact that America, in it’s political structure, is much more stable and the EU is very fragile, since it’s not united as America, just a Union of separate nations that have not even managed to establish a constitution. So the underlying risk is a breakup, which soon some stronger members like Germany will wish for. The deflationary effect is far lower, since the average drop in commodities of roughly 30% is diminished by the more expensive Dollar by roughly 20%. Hence, they have the negative effect of a relatively higher material cost in a much weaker global demand for products and cannot benefit by the stronger Euro. Americans, who are net importers of goods, have to pay much less in an even lower margin world, due to high inventories and more competition. Finally, they are at about 6 months ahead of Europe in digesting the crisis.

Coming back to the EURUSD, one can play easily sell any rally in Euros until we hit 1.22 with a prior struggle point at 1.31 but that is not a serious point. From 1.22, we can expect a serious bounce for a few weeks though back to 1.35/6 (38% retracement and a good resistance area).

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~ by behindthematrix on October 12, 2008.

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