By Jake Fillipp

EUR/USD Correction?

Selling the U.S. Dollar has been nothing short of a one-way train to profits for the past year. After breaking through the fabled 1.40 level in September the EUR/USD rallied nearly 10 big figures to nearly test 1.50 last month. With supermodels proclaiming a desire to be paid in Euros along with so many stories about the weak Dollar finding their way in non-financial news mediums, contrarians have answered the call and the Dollar has staged an impressive comeback against its Euro counterpart the past couple weeks. The question is whether this is just a correction within an uptrend or a major reversal towards a prolonged period of Dollar strength.

Keeping it Simple

As a technician sometimes it can be rather confusing to pay attention to fundamentals. One day the Dollar rallies in what the media will describe as a flight to quality. The next day the Dollar drops over concerns about the housing market and its impact on economic growth. Additionally, with so many technical indicators at one’s disposal many traders forget the most important of them all…price! By looking at the price behavior for the EUR/USD and the way it has behaved in the past can possibly give us clues as to what may be in store for the Dollar in the future. The pair spent most of the second half of 2006 in a consolidation range between 1.2450 and 1.3000. After breaking out of that range on Thanksgiving of last year, there have been three notable Dollar rallies. These are shown by the red and green arrows on the chart. Each U.S. Dollar rally corresponded to a decline in the EUR/USD of between 435-515 pips, lasting anywhere from 10 to roughly 45 days before the Euro found support. As the chart shows, every green arrow simply represented another opportunity to buy the dips in a longer term uptrend. Last week the Euro bottomed around the November monthly low of 1.4520, roughly 450 pips from the all-time high set last month. Trading is all about probabilities. The Dollar very well may rally into the year end with the EUR/USD dropping precipitously further. However, recent history suggests otherwise. Any further declines in the Euro could just be another opportunity to buy the dips in the longer-term uptrend.

Charts courtesy of FX AccuChart

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