11/03/2015: How low can the euro go?

The price of EUR/USD is falling, and falling hard. It may be a crowded trade with the world and its dog seemingly short, but that does not make it the wrong trade. Three quarters of Hantec clients are now short the euro. Analysts are falling over themselves to talk about not only parity versus the US dollar but there is also talk of further retreat beyond that. I read one analyst targeting a $0.8500 target for the end of 2016, and whilst you are at  it, why not a retreat back to the $0.8225 low that we saw in 2000.

euro down

Well, if you got Mario Draghi alone in a quiet corner it is just possible that he would tell you that he is happy with how the euro continues to fall. This will help to improve the competitiveness of the Eurozone, and should benefit the eurozone economy. However, how low could the euro go in this phase of selling?

First thing to note is the significant strength of the bear trend for EUR/USD, with momentum hugely negative. The last time the RSI (a technical momentum indicator) on the daily chart was this low was in January just after the original announcement of QE. That time the RSI got to 17 before a six week consolidation set in on the euro, whilst in September the RSI got to 16 which was the lowest since 1997. The RSI currently sits at around 16, which is almost at record levels. So that would suggest that whilst momentum is strong to the downside, it is also running out of downside potential in this current run.

EUR fib

The problem is that if the euro makes a decisive close below $1.6020 which is around the 61.8% Fibonacci projection level of $1.2569 to $1.1098 measured from $1.1532, then the next move could easily be on the way towards $1.0060, or close to parity. The euro has already traded as low as $1.0559 (around 60 pips clear of the Fib level), so this does not seem to be causing too many thoughts of stopping the euro quite yet.

Could there be a selling climax underway? Traded volume levels on the euro is something to watch during times such as these. Yesterday, after weeks of a declining trend in volume, we saw a notable pick up in volume on the euro, with the highest level since 23rd January. This may not sound much but but this is certainly interesting. Today is also well on course to beat this level. At market extremes you are looking for climactic selling. It would seem that whilst the volumes are becoming elevated, there is still more evidence needed to suggest this is a selling climax.

euro vol

My take from this is that I feel that a consolidation may be close with downside potential becoming limited and selling volumes picking up. Sentiment against the euro is so bearish and at times like these, the market becomes too short and leaves it open to short covering. However there may need to be a catalyst to generate the support. The problem is what and when? The first real opportunity could be a disappointing US retail sales tomorrow, but to be more realistic it could be that we have to wait until the FOMC next Wednesday.

With this in mind, whilst the technicals are reaching extreme levels there may well be further legs in this sell-off yet.

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