EURO/USD Is Testing Key Resistance Lines

The economic conditions are rapidly deteriorating in Europe and the European Central Banks is preparing another series of rate cuts in the coming meetings. The Euro currency, in the mean time, has found an important support level against the U.S. dollar. A breakout could lift the currency to higher levels for the short/medium term.

Prices are falling. Trend has really changed?

More rate cuts are expected around the globe, as G10 central banks are confronting the financial crisis with different economic measures. So, after the stimulus package, a softening of the fiscal policy might be an important instrument to stimulate the economic growth. In reality, countries with important saving rates have a competitive advantage over those nations that instead heavily rely on foreign currencies to finance their debts. In the United States, more interventions are shortly expected by the U.S. government and maybe the Fed. In effect, the economic contraction should continue for few more months and companies face the decline in demand by cutting prices. In October, the Consumer Price Index (CPI) declined to 3.7%, while the Producer Price Index (PPI) is now at 5.20%. The call for deflation will mount until the aggregate demand stays weak, but costs might pick up again, if history repeats itself.

Let's see how. Since 1900, interest rates have shown the tendency to trend for about 30/35 years from lows to highs. The first cycle began around 1900 and ended in 1932. The second started near 1947 and continued until 1980. Since 1954, the Fed fund rates have based every 4/5 years, within the long term bull trend, before again targeting higher levels (1950, 1954, 1958, 1962, 1967, 1972, 1977). The last decline of the actual economic cycle occurred in 2004. As a result, 2009 could be a crucial year for interest rates. Presently, the Federal Reserve is watching events very carefully and rates might be lowered again, if the economy in the United States will not pick up over the next months. Nevertheless, inflation could climb once more, once recession will subdue.

Other rate cuts expected in Europe

Recession is intensifying and the European Central Bank (ECB) should cut rates again in the coming meetings. In November, the Euro zone manufacturing PMI slid to 36.2 from 41.1, while the services PMI receded to 43.3 from 45.8. The coming months will be even tougher for the entire European continent, since manufacturing orders fell to 29.7 from 36.2 and the employment rate moved down to 41.3 from 44.4. Finally, the new business index touched the lowest level ever recorded at 41.1 from October's 43.2. In Germany alone, the service PMI contracted for the second straight month to 46.2 from 48.3 in October. At the same time, the manufacturing activity has softened for the fourth consecutive month to 36.7 from 42.9. The negative data is confirmed the latest Bloomberg Euro-zone retail Purchasing Manger's Index (PMI).

The mid-month survey index fell in November to 44.3 from 46.2. It has been the fifth straight down move. Italy showed the sharpest contraction in retail sales, but also Germany and France are now deep in red. In Italy, various economic reforms are needed to have the economy on the move again, but the political struggle has so far postponed any decision. Consequently, in September, the Italian trade deficit increased to Euro 2.58 billion, as imports overcome exports. In France household spending on manufactured products fell instead 0.4% month-on-month in October after increasing 0.5% in September. Consumer confidence is at the lowest level and the decline in spending covered most sectors with cars receding 0.9%. Unemployment and housing are the two main European challenges. In September, Euro zone construction output moved down 1.3% month on month after rising only slightly in August.

USD/CAD: a double top forming?

EUR/USD is still dancing on the support line of the past 8 years at 1.25. A move below 1.2150 is necessary for 1.20, 1.16. A close above 1.3010 would instead quickly target 1.32/1.34 and possibly 1.40, 1.42. In fact, the divergence between the Rsi indicator and current price support higher levels for the Euro currency.

GBP/USD found a good support level at 1.44 which matches the trendline of the past 8 years. A swing above 1.5350 would target 1.55, 1.60 and only a decline below 1.4320 would let the price to decline to 1.40.

USD/JPY appears to be designing a double bottom formation. The support at 93.50 is holding so far and the market might try again to rise to 98, 100.

USD/CAD reached the important resistance line of the past 24 years at 1.27/1.30. This level is holding and only a swing over 1.33 will target 1.36, 1.40. The market appears to be designing a large double top formation which should be confirmed by a decline below 1.1950. In that case, the next objective could be 1.16, eventually 1.12.

Angelo Airaghi
MG Financial Group
http://www.mgforex.com

Angelo Airaghi is a Commodity Trading Advisor, registered with the National Futures Association and the Commodity Futures Trading Commission. He has been an active professional since 1990 working for major international financial companies. In the past 10 years, Angelo Airaghi has been an analyst and commentator for national and international media.

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