Looks Like A Top In The Euro

The $/Euro seems to have formed a triple to top around $1.50 with the most recent peak occuring in just the last few days ($/Euro 6 Month Chart).

Today, the European Central Bank (ECB) decided to hold rates steady but did make some concessions to economic growth saying that the uncertainty regarding the outlook is “extremely high” and risks are to the downside (ECB Feb 7 Press Release).  This compares to their prior characterization of the uncertainty regarding the outlook being simply “high” (ECB Jan 10 Press Release).

The euro sold off today in response to the decision to hold rates steady and the accompanying statement.  I interpret this, along with the resistance at $1.50, to suggest that market participants expect the ECB will be cutting soon which will provide the fundamental rationale for a euro top.

Disclosure: Top Gun is short the euro via the Currency Shares Euro Trust (FXE).

UPDATE (Mon 2/11, 10:15am): The Foreign Exchange column in this morning’s Wall Street Journal, “Dollar’s Upturn Likely To Solidify: Investor Focus Turns To How Europe Rates May Come Into Play” (subscription required), sums up last week’s action similarly:

ECB commentary will be important as bank members seem to be starting to converge.  They’re talking less about inflation and price pressures, and more about risks to the economy.

… It seems market opinion is shifting toward the idea that the euro is not going to be able to rally above $1.50.

– Geoffrey Yu, Currency Strategist, UBS (bold and italics added)