Have The Fx Markets Entered A New Euro Bull Market?

The tide looks like it has turned and the FX markets continue to punish the Dollar

. Whilst Sterling is benefitting a little it looks like investors are turning to the Euro.

The US Dollar experienced a considerable flight-to-quality during the Greece/Spain problems of the first half of 2010. Since then we have seen a Euro rally and an unwinding of Dollar positions.

The concern hovering over the FX markets is how much can the Southern European states drag down the rest of the EU. The UK, Germany, France, Holland etc are a vast percentage of the EU GDP/exports etc. However Italy, Spain, Greece etc do still contribute some 20-25% to the final figures. Losing 80% of that 20-25% would be far from good and the worry for traders is still whether one bad apple will infect the rest.

Looking at the next direction for the markets, there has been a long slow grind higher which is a classic sign of FX trend building. FX markets tend to move in vast longer term shifts in one direction or the other. Looking at the Dollar/Euro (ECU) market there was a six year rally from 1995 to 2001, that was followed by a six/seven year move lower.

If you are spread betting this is not to say that it is all one-way traffic. Even within these long-term moves there were 6-12 month retracements. If you are day trading this is not of much help and the current market move looks like it is still just a bull move within a bear market. At this moment in time, we have not yet shifted to a long term Euro bull market.

Having said this, the steady stream of weak US economic data, as well as a certain nervousness that the US Administration might opt for a further stimulus increase, is making traders rather unsure of holding the Dollar for any length of time. The natural alternative to the US Dollar is the Euro and that is where the money is going. For the first half of 2010 we experienced nobody liking the Euro and everyone being the Dollars best friend. The question for those trading the Foreign Exchange, forex spread betting and CFD markets is whether the market has done a 180 degree switch.

We could be stuck in a market retracement but it looks like many investors are taking the broader view that a) US Federal Reserve is unlikely to tighten its current fiscal policy and b) it is unlikely that the American economy will suddenly regain the sort of momentum we saw in the latter half of 2009 and early part of 2010.

If this is the case then, in the short-tem, unless a sudden problem hits the Eurozone, it is difficult to see any particular influence that could cause another market reversal for the Euro.

by: Robert Thomas

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