The US dollar will continue to attract inflows in this environment, and we may be entering a very nasty cycle going forward.
The euro broke significant support on Friday as we have seen a stronger-than-anticipated jobs number in the United States. This makes it more likely that the Federal Reserve will have to be extraordinarily aggressive with their monetary policy. With this being the case, the market should continue to see a lot of downward pressure, but we could get the occasional bounce, as markets do not go in one direction forever.
Any rally at this point I would look at with extreme suspicion unless the war in Ukraine suddenly ends. Ultimately, I do not think that is going to happen, but even if it did, there are plenty of problems in the European Union to continue to drive the euro lower. Inflation in the United States is rocketing higher, and the Federal Reserve is about to get very aggressive about monetary policy tightening.
The size of the candlestick is also rather telling, showing just how negative things are. At this point, the market looks as if it is ready to try to break down below the 1.09 level, perhaps opening up a move down to the 1.08 level. I think that the 1.11 level above is going to continue to be a massive resistance barrier, extending all the way to the 1.12 level. This is an area that was previous support, and it should have a significant amount of resistance in the same general vicinity.
It is obvious that we are a little bit oversold in the short term, but I think given enough time we are likely to see even further downward pressure. This is a simple “fade the rallies” type of market going forward, and I just do not see how that will change anytime soon. Adding more downward pressure is the fact that German bonds are now yielding negative interest rates, so it makes less sense to own euros anyway. I do believe that eventually, we will have to come to terms with whether or not we have gone too far, but right now there is almost nothing to save the euro. The US dollar will continue to attract inflows in this environment, and we may be entering a very nasty cycle going forward.