Weekly Strategy

Posted 5/26/05 EUR/USD: The EUR has been under pressure for the past several weeks as signs of further anemic growth and a likely rejection of the new EU constitution by French or Dutch voters weighs on the common currency. The most recent waves of EUR selling have been closely tied to poll results that show rejection of the constitution is all but certain. This sets the stage for a classic sell the rumor, buy the fact scenario. The fundamental rationale for a rebound in the Euro is that the rejection of the constitution is a localized phenomonon of disaffected French and Dutch voters, and is unlikely to sway international investors away from the Eurozone for any length of time. In fact, the rejection of the constitution could have the effect of rejuvenating consumer sentiment and domestic demand since the pace of integration of mainly eastern European new members will slow, likley alleviating western European fears of imminent job losses. On the technical side, EUR/USD has reached a significant pullback level, namely the area between 1.2430/1.2530, which represents the breakout point from mid-Oct. 2004 when the dollar began its most recent slide. Given the likely predominance of short EUR/long USD positions in the market, the risk is for a sharp reversal in EUR/USD recent declines. In terms of technical studies, the DMI indicates no trend is in place, MACD is basing, and Williams %R is at -100. Strategy: Buy 50% of EUR/USD long position at 1.2510/30 (current levels as of this posting). Look to add the other 50% on further weakness to 1.2430/50 or on a reversal over the 1.2700 level. This strategy will fail on a daily close below 1.2430, and the risk is the level is exceeded briefly in the pandemonium following the constitution referenda. For this reason, conservative traders might wish to wait until the votes are cast and enter longs after a spike low has been made and EUR/USD is on its way back up.