The euro has proven quite strong over the last 18 months, gaining nearly 13% on the U.S. dollar since July 2012.
But that trend looks like it will soon reverse — a welcomed change for German exporters and U.S. dollar bulls, alike.
Here’s a chart of the EUR/USD exchange rate going back to mid-2012.
As you can see, I’ve drawn a trend line (in blue) connecting the higher lows that are characteristic of a sustained uptrend.
Successively higher highs are also characteristic of sustaining uptrends. That’s why the euro’s failure to break above its October highs (left-most red circle) in December (right-most red circle) is a warning sign that the euro’s bullish trend is waning.
The euro is now trading at 1.3660, just 1% higher than the trend line that has supported the euro since 2012.
The range between 1.34 and 1.35 is the level to watch. A break below this support zone means the trend line is broken and further declines are likely, probably as far down as the 1.27 to 1.30 range, in the short-term.
That’s a healthy decline of at least 5% — a move welcomed by both German exporters and investors in the U.S. dollar.
BMWs become more cost-competitive when the euro weakens, so Germany would like to see the euro lose some of its recently pumped-up value.
Meanwhile, the U.S. dollar now has a bullish wind at its back as emerging-market currencies are spiraling downward, triggering a global flight to safety that always benefits the dollar.
It looks like the strong euro’s days are numbered. Make sure you have exposure to this currency trend-in-reversal, either through a bullish dollar play, like the PowerShares U.S. Dollar Bull ETF (NYSE: UUP), or a bearish euro play, like the ProShares UltraShort Euro ETF (NYSE: EUO).
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