Over the past month, the Euro has been facing a world of pain to the downside, having rejected the 1.33 level like it was a brick wall. At the time of the top, I did not see the trendline drawn on the chart - it just happens to be right at 1.33. Sometimes the most obvious thing is in hindsight. More obvious was the fact that the 13 month moving average happened to be sitting at 1.33 and it hit that level on the dot. Thus two major reasons to sell. On the other side of the ledger, the British Pound, the same currency I was hammering away at in my note on the Chinese market, looks like it is in breakout mode with a move over the 13 month MA. This argues a few things. First, the EuroGBP will be trading in favor of the pound based on this movement and b) that the USD might be catching a legit bid at the moment.So what does all of this mean? Well last time the Euro collapsed to lower levels, stock markets moved higher and the dollar traded strong. We saw rates back up as well with 10s moving towards 4% and the bond near 5%. With my bullish fundamental model for the dollar actually trending higher, a break of the Euro from the 1.25 level sets up the currency to trade back to the previous lows but I also perhaps down towards the 1.10 level. Before the market took this as a negative but given the economic data that poured out of the Eurozone before on the weak Euro, the market might take this as a bullish event.
Also in the past, a falling Euro/GBP cross rate has correlated well with a rising dollar index; this would have implications for the screaming yen. A change even slightly in the trend could be helped along by the BOJ, which is clearly not happy about the rising Yen. An improving pound also could help the UK move out of its morass and lead to better currency inflows - while hurting manufacturing somewhat.
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