Is the Euro about to Tank?
Eurozone inflation in March fell to only an annualized 0.5% rate causing a lot of chatter about the ECB’s meeting on Thursday, 4/3. Much of the discussion has been focused on the IMF’s Managing Director’s call to action for the ECB to do more to battle the low growth in Europe.
Christine Lagarde truly believes that the world’s central banks control the fate of the economies in their hands as she boasts, “the risk is that without sufficient policy ambition, the world could fall into a medium-term low growth trap”, but isn’t that what the World’s been battling unsuccessfully for five years now? Evidently now it’s up to Europe’s citizens to bail out the world, and the world forever is never again to have a cyclical business cycle (NYSEARCA:FEZ) ?
This all seems like a game of hot potato as each country stimulates, kicks the business cycle can down the road, and then hands off the stimulus responsibility to the next participant (Japan, then U.S., then Europe), meanwhile declaring victory prematurely as they rack up more and more debt and future promises.
But at what point do we realize stimulus will never be bigger than thy markets?
We truly are in unprecedented territory where Central Banks seem to be the answer to every problem. In this case the IMF may get their just desserts, but they likely will have buyer’s remorse.
The Markets will ultimately be Right
Is the ECB about to start down a QE path similar to the one the Federal Reserve Bank in the U.S. is now wrapping up?
The IMF sure thinks that should occur, and we are about to see who really controls their citizens’ money, their own politicians voted in by the people, or a centrally planned and appointed special interest group, like the IMF, that dictates how citizens’ taxes should be appropriated around the world?
(For more on Central Bank failures, see this article on how the Central Bank’s policies are not weakening the dollar.)
Regardless what the ECB (or IMF) decides, the $5 Trillion daily foreign exchange markets will ultimately have the last word, deciding the fate of the Euro zone (NYSEARCA:CEE) whether the central bank intervenes or not. The mere size of these markets dictate just how little the central banks do actually control.
The market is the gorilla in the room no one is talking about, and that gorilla tells us that the Euro (NYSEARCA:FXE) is already in a weakening trend as the charts suggest this inflation could pick up significantly, giving the IMF exactly what they wanted.
What the Market Says
The first chart below is a long term view of the Euro showing that after strengthening from its initial launch in 1999 it has indeed been weakening the last five years from its strongest point reached back in 2008.
In the chart you can see the weakening over the last five years as outlined by the blue declining trend channel.
The next chart is one recently provided via our Technical Forecast showing why the Euro (NYSEARCA:EUO) may weaken significantly from here as two technical resistance areas collide near price at $1.3800.
These resistances, which thus far have done their job in rejecting price, suggest the Euro’s two year rally may be over and prices may be kicking off a huge decline to sub $1.2000. These areas of resistance so far have brought in sellers and suggest the Euro may be rolling over.
In that subscriber update I also provided the price level that would put the odds even more in favor of shorting the Euro as well as trade setups for the Dollar (NYSEARCA:UUP) and Yen (NYSEARCA:JYF).
If that price level is breached a high probability trading opportunity would present itself in shorting the Euro and longing the Dollar.
The better thing about this trade setup is that we also will know exactly when we are wrong.
If the Euro rallies above $1.4000 it would break out of this pattern and indeed confirm the IMF’s worst fears, a strengthening Euro, likely the result of further deflationary forces.
If that occurs there is no doubt the ECB would be forced to chase the market and initiate even more stimulus to attempt to counter the forces.
What this all amounts to is a short Euro trade setup once our confirmation price is breached, with risk of a few cents ($1.4000) but profit potential over 15 cents (below $1.2000), resulting in another high reward:low risk trade opportunity for our subscribers.
For now, the Euro markets are telling us the ECB does not need to stimulate as the charts suggest inflation is about to rear its ugly head, significantly weakening the Euro over the coming year.
The ETF Profit Strategy Newsletter and Technical Forecast use technical, sentiment, and fundamental data to stay ahead of the global macro markets. We help investors identify actionable trade setups with both ETFs and options.