The euro currency had been under pressure since July 2008 when it traded at an all-time high against the dollar at $1.59880. The financial crisis hit the European currency particularly hard. Unemployment rose in Europe, and economic weakness in Southern Europe led to a bailout of Greece which pressured the currency. Moreover, immigration issues as refugees arrived on European shores from North Africa and the Middle East caused a dilution of the economy and weighed heavily on the Union’s currency.
The Brexit vote in June 2016 not only hurt the value of the currency, but it put the future viability of the European Union and euro currency in doubt. When it comes to the euro’s value relationship with the U.S. dollar, the bearish market lasted from July 2008 through December 2016. However, it is starting to look like the lows at the end of last year was a bottom for the European currency and the prospects for the euro are looking better these days that it has for almost a decade.
The low for the euro came in December 2016
December 2016 could mark the lowest level for the dollar-euro currency relationship we will see for many years. Source: CQG
As the monthly chart highlights, the currency pair fell to a low of $1.03675 just before the end of last year, which represented a decline of over 35% from the 2008 highs. Since then, the euro currency made a higher low in January and February of this year and moved higher every month since then. Momentum on the euro-dollar foreign exchange rate is higher, as the technical picture for the European currency is looking very bullish these days.
Mario Draghi has planted the seeds of a huge rally
Back in 2014, the dollar began its ascent after the U.S. central bank announced a tapering of quantitative easing and that an end to accommodative monetary policy was on the horizon. Source: CQG
The monthly chart of the dollar index futures contract illustrates that it took off from below 79 to trade at over the 100 level in just nine months as accommodation came to an end. The European Central Bank appears to now be in the same position that the Fed found itself in back in May 2014. Over recent months, Mario Draghi has started to sound less accommodative and more hawkish when it comes to monetary policy. European quantitative easing will end at the end of 2017 and tapering could commence even sooner. Moreover, with short-term rates at negative forty basis points, there is nowhere to go but higher when it comes to euro currency rates. I history repeats itself; ECB President Mario Draghi is currently planting the seeds of a huge rally that will take the euro much higher against the dollar over the weeks and months ahead.
Elections in Europe in 2017 have cemented the European Union
The Brexit referendum in June 2016 created doubts about the future of the European Union and the euro currency. If other European nations followed the U.K., it could have created a fatal blow for globalism and the Union that binds the economic and political futures of the countries of Europe together. However, the Dutch were the first to go to the polls in 2017, and they voted for a pro-EU candidate. In the most significant election so far in 2017, Emmanuel Macron defeated Marine LePen in the French election and France now stands with its European partners. In September, the Germans will go to the polls, and Chancellor Angela Merkel looks like a shoo-in for a fourth term. As the strongest economic nation in the Union, Germany is the glue that holds the EU together. Merkel’s victory will be another feather in the cap of the euro currency which has not only a recovered but has broken out to the upside.
A technical breakout to the upside
The euro now appears to be in a strong bullish trend, and only one technical level stood between the European currency at the $1.20 level against the dollar, at a minimum. Source: CQG
The monthly trend of the euro versus dollar relationship shows that the euro has broken the trend of lower highs and lower lows over recent weeks. The euro traded up to $1.1718 on Monday, July 24 which is exactly equal to the highs seen in August 2015. While the move on Monday could create a double top for the dollar-euro exchange rate, the momentum of the euro makes the odds of yet another higher high likely in coming trading sessions. The next level of technical resistance in the euro above $1.1718 is at the May 2014 highs of $1.3993 against the dollar. Technical support for the dollar index stands at 91.88; the May 2016 lows and a move to $1.20 in the dollar-euro relationship will likely push the dollar index below support. The euro has broken to the upside, and the dollar appears to be heading for a breakdown from a technical perspective.
Currency trends can last years
Currency markets tend to move slowly because central banks and monetary authorities tend to manage exchange rates. Therefore, the move in the dollar index from May 2014 lows of 78.93 to highs of 103.815 in January 2017 took thirty months. The rally in the euro commenced last December and is currently only eight months old. Many events on the horizon are likely to trigger further rallies in the euro. The German election could cause a leg higher for the European currency as a Merkel victory will cement the future of the Union. Moreover, an announcement by the ECB will likely ignite a bullish storm for the euro if President Mario Draghi tells markets that QE will end and euro rates will rise from negative territory.
The euro currency has been in recovery mode since reaching a bottom in December 2016. However, that recovery has shifted into bullish overdrive, and now the euro looks like it could have a long way to go on the upside over the coming weeks and months. A combination of political, economic, and technical support for a currency represents a strong case of a rally. While the euro may not explode to over the $1.20 level overnight, it seems destined to climb to that level, and all signs are that the currency could have a long way to go on the upside from its current level.
Each Wednesday I provide subscribers with a detailed report on the major commodity sectors covering over 30 individual commodity markets, most of which trade on U.S. futures markets. The report will give an up, down or neutral call on these markets for the coming week and will outline the technical and fundamental state of each market. At times, I will make recommendations for risk positions in the ETF and ETN markets as well as in commodity equities and related options. You can sign up for The Hecht Commodity Report on the Seeking Alpha Marketplace page.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.