A lot of things have been happening recently. Last week, the foreign exchange market started off with the safe haven dollar lower across the board as a result of increased market optimism. In Greece, the pro-bailout party won which led to Antonis Samaras eventually being sworn in as Prime Minister.
More goods news came mid-week when German Chancellor Angela Merkel finally acceded to using the funds of the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) to buy GIIPS bonds. And finally, in the U.S., the Federal Reserve announced that they have opted to stimulate growth by continuing Operation Twist.
The market appetite for risk faded quickly though, as participants realized that there really was no major change in the fundamental picture. If Greece does get its next tranche of bailout funds, it only addresses the solvency issue of one country among many. What about the other nations who can possibly fall into the same insolvency trap like Spain and Italy?
Moreover, even though the repayment conditions are easier, the fact is that it is still just debt for a nation that actually needs to reduce its debt.
Aside from all that, macroeconomic data from the rest of the major economies remain weak. Germany, euro zone‘s largest economy, released worse than expected PMIs, IFO business climate index, and ZEW economic sentiment reading.
Leading indicators like these are very important when analyzing the outlook of an economy. They give us a preview what’s probably going to happen in the next few months before the change actually occurs.
Looking beyond the euro zone, recent top-tier reports from the U.S. such as manufacturing indices, existing home sales, and jobs figures also fell short of expectations. Heck, other economies such as the U.K. or Australia aren’t performing so well that their central banks are considering further easing!
Technicals also seem to confirm this downbeat perspective as the 4-hour chart of EUR/USD is hinting that a downtrend could be in the works. For one thing, the pair already made a strong break below the uptrend line that began this June. On top of that, price also bounced off the closely-watched 200-period SMA on the same time frame.
If you’re thinking of making some pips off this doomsday path, you might want to consider taking a bearish position on EUR/USD. Waiting for a break below this current consolidation and riding the move all the way to the next major support level at 1.2300 seems like a good game plan.