3 Reasons the Euro is Poised to Rally

posted in: crude oil, ECB, eur/usd, euro | 0

All the talk over the weekend has been about a ‘Grexit’ (a Greek exit from the euro) as the new Greek Finance Minister, game theory expert Varoufakis, continues to follow his path of utilizing a “hostage situation” negotiation strategy with Greece’s EU partners. While sentiment continues to remain extremely negative on the euro, there are some reasons to believe a sizable turnaround in the common currency could be fast approaching:

1. Speculative net short interest is essentially at an all-time record with small speculators at an all-time record short interest and large speculators at their 2nd largest net short position on record (only June 2012 was greater):

Euro_Futures_COT

Speculators in euro futures have a net nominal short position in excess of $35 billion!!

2. Could the recent large decline in energy prices help to stimulate eurozone economies and make exports more competitive globally?

Oil_winners_&_losers

The answer is yes. Stronger economic growth and export growth should provide a tailwind for the euro currency during 2015 if a Grexit can be sidestepped.

3. Currency markets have moved well ahead of the recent Greek turmoil and any indication that Greece and its EU partners have reached a deal could set off a large short covering rally. Any rally is likely to be capped near the gap fill and previous support level at 1.20:

EUR_USD_Weekly

Such a rally would serve to rebalance the market and set up the next leg lower which will likely involve a trip to parity.

It is important to remember that markets rarely move in straight lines for very long and after a nearly 3000 pip decline in barely more than 6 months it is somewhat shocking to still see so many vocal EUR/USD bears. In fact, according to investup.com sentiment on the euro is worse than it was in June 2012:

Euro_Sentiment

This fact alone should curb ones bearish enthusiasm regardless of what is going on in Greece.