We may have one more rally but the highs are in and the euro will decline, as the dollar bearish fundamentals have peaked. You don't need to be clever to see why and work out the potential. Here are all the facts and a potential 700 pip opportunity and that's a lot of profit!

Many traders think markets some strange force but they don't they move in line with the long term fundamentals but of course you can't trade on these, you just know they are going to force the euro lower so we have included the technical levels as well and will indicate under valuation and over valuation for marketing timing purposes.

So why is the era of dollar selling over?

Here are the main reasons.

- Bearish sentiment of investors has peaked

- The market is not just focusing on problems with the dollar but in other countries

- There is a significant improvement in the current account deficit underway

- The Housing market is on the road to recovery and the excess supply should start to decline

- Employment numbers are still poor but coming in better than expected

- Higher yields are needed but the yield disadvantage will narrow as Fed looks to raise rates

The economy still has problems of course but the real key is rates the US has aggressively cut and many other economies have not this leaves plenty of upside potential. While rate rises may not occur in the short term the aggressive cutting is over and the bearish scenario is factored in and the dollar is hammering a base, while the storm clouds gather for the euro.

Euro

Here are the main reasons which point to euro weakness

- Current account balances no longer show the euro is under valued

- In terms of purchasing power parity the euro U.S Dollar rate should be around $1.20

- This shows that the euros rally has really been based on interest rate perceptions

- The ECB will be reluctant to raise rates with economic activity weak

- Labour markets remain tight but economic activity will dictate rate rises

Take the above and what do you have?

The interest rate differential that has driven the euro higher has gone and we will now see a period where the dollar works its way higher.

The Charts

If you check out the weekly chart you will see a clear top in place and the up-sloping trend line which has supported the advance has been penetrated and 1.50 is the initial target. The weekly chart really lets you see the wood from the trees but you need to time off the daily chart.

On the daily chart the resistance is the same as the weekly and we are trading in a range which has been in existence since March. The target at present is the bottom of the range 1.54 and if this gives way 1.50.

We are a little oversold at present but any rallies will get to around 1.57, 1.58 at best and are a sell on falling momentum, if the euro does not rally a close under 1.54 cements the bull argument

Nothing complicated and so far our sale at the pop to the highs is 400 pips up but as with all trends there are more opportunities coming to take advantage of euro weakness and if you can get in then you could enjoy a ride that is very profitable and could see the euro below 1.50 by year end and that's a lot of profit!

This article was written on August 2nd

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