DailyFX Analyst’s Maintain A Bearish Euro Bias, But Will They Be Rewarded?

DailyFX analysts continue to maintain a bearish bias against the Euro as they look to take advantage of the single currency’s correlation with equity markets. Stock values continue to rise despite the lack of supporting fundamentals increasing the chances of a reversal.

Signs that the global economy is emerging from its recession sent stocks to their highest level in over a year with the Dow breaking back above 10,000 at the end of October. However, the blue chip index’s inability to hold above the psychological level would fuel our analyst’s bearish Euro bias. Rising unemployment (10.2% in the U.S.) and the prospect of government stimulus programs coming to an end would weighed on risk appetite. Short Euro positions would initially be rewarded with the EUR/USD failing to stay above its own prodigious level of 1.5000. However, a pledge from the G-20 to keep interest rates low and maintain government programs (U.S. extension of $8,000 home buyer tax credit) reignited demand for higher yields pushing equities and the single currency back above their psychological barriers.

Where Are We Headed?

This week we saw 60% of our analysts choose to reinitiate their short Euro positions and were rewarded by today’s bearish descent. Stock markets have pulled back after running into staunch resistance levels with the Dow facing the 50% Fibo retracement of the decline from its all-time high, a barrier that traders may be unwilling to conquer without improving fundamentals. A merger from Hewlet Packard and 3com along with a drop in initial jobless claims to its lowest level since January failed to excite markets today. Therefore, we could be seeing the beginning of a bearish trend for stocks which will most likely bring the Euro in tow, as the two have been in lock step since September. Euro-zone GDP figures due out tomorrow are expected to show the regions recession came to an end in the third quarter which could provide support for the single currency. However, the backward looking growth gauge may do little to overcome concerns that the global economy is on a hard path to recovery.