In my view, there is a simple profit opportunity which is shaping up which can offer great risk to reward and anyone can take advantage of it. Lets take a look at the EUR / USD climate for March 2011 in more
detail.
The Euro trended up and tested the 1.40 resistance level yesterday but closed below this level and at the time of writing is down at 1.3920. The Euro has made some great gains recently and everyone is now bullish the Euro – so will it continue to the upside? Maybe but the best the bulls can hope for is 1.42 which is last November's high. The crowd never wins long term in Forex markets and its a fact that the markets rally when there is most bearish and fall, when there is most bullish and the Euro has tested resistance and is due to fall further.
So what's been behind the Euro's big rise?
The ECB has indicated that they are probably going to raise interest rates as early as April and interest rate earnings against the Dollar will widen, as the Fed as made no similar hint that it will raise interest rates. So why will not the Euro continue to rise? Well this news is already discounted in the price and Forex markets do not just move to interest rates, they also move to the health of he economy and Euro zone is in trouble.
Debt Problems in Euro Zone to Send it Lower
The Libyan crisis, has defected attention away from the mounting debt problems in Euro zone. Fitch cut Spain's credit rating on Friday and Moody slashed Greece's credit rating today. We have already seen Ireland and Greece, seek bailout money and Portugal and Spain now look in trouble. So what will an interest rate rise do these countries? It will send them more into debt and even worse, the ECB has no plan to deal with the debt problems if they mount which they are now.
So we have the good news discounted in the price and bearish news mounting. For now greed is pushing the Euro higher but we expect that to end between 1.40 and 1.42.
Watching for the Break Down
Resistance on the chart is clear – you have a level of resistance here and then at the 1.42 level. Watch these levels closely and watch for momentum to fall and this will warn of a breakdown. If we do start to fall, the first level of support is 1.37 and then 1.34. We would be highly bearish of the Euro at current levels and look for a pull back. At present sentiment is bullish and greed, is all that's sustaining the move, we expect greed to turn to fear which will send the Euro down and create a great low risk profit opportunity.
Final Words
Latest data from the CFTC shows speculative long Euro positions are at their highest level since January 2008 and the smart money hedgers, are already selling the rally. With the Euro at a bullish extreme and the Dollar at a bearish extreme and that means a potentially big gain for the US Dollar on the Euro.