Wednesday, February 17, 2010

Euro Zone in trouble, affecting the Forex markets, but may give clear direction soon

Picture of the EuroDon't get me wrong. I still think economically the Euro zone is fundamentally still stronger that the US, but I've said it all along that the Euro is severely overvalued against its overseas partner. It's actual value should lye around $1.10, not $1.35. (the PPP, Purchasing Power Parity better know as the Big Mac theory).
For instance, if a pencil costs €1 in Europe, it should cost about $1.10 in the US. But because of speculation, banks, businesses and traders in the currency markets the price is where it is today. However with the problems in Greece and other weaker Euro nations the quote today may not last for very long. Talks about a crumbling Euro and the whole Euro economic block falling apart by some is totally ridiculous and will never happen. At least not in my lifetime. I will devalue against the US dollar further. I know most fellow trader will disagree since more then 57% are long this pair, but I've been more right then the majority in the past. Mainly I think this is because I blend in some fundamental analysis in the mix there while the 'majority' is staring at screens with millions of indicators by their side. Who's right? Nobody knows. Keep in mind, the Euro was trading in the $1.20's around this time last year, and that was without the negative news from Greece and some of the rest of the Eurozone members like Portugal, Italy, Ireland, Greece and Spain (also knows as PIIGS).

Let's take a look at the charts:

While most traders were banking in the beginning of the chart to go long this pair I advised to use caution. Especially now that the RSI is pulling back to 'normal' territory (not signaling oversold anymore) and still goes downwards. My trade would be a short position, if I would be in one but I'm not because I believe the pair is trading sideways still and anything can happen from here. Just keep in mind that not all indicators are pointing to a long position, a reason I post this article to prevent you from losing money because you went with the crowd. We'll see what happens tomorrow and how the markets, especially the Eurozone and the US will play this one out. I'm almost certain then we know what ultimately the trend will be.

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