History Favors Euro's Trend Breakout

10/19/2012 9:00 am EST

Focus: FOREX

Ashraf Laidi

Founder, Intermarket Strategy Ltd.

With all eyes on the EU Summit currently underway in Brussels, Ashraf Laidi, chief global strategist at City Index/FX Solutions, shares his thoughts on where the euro is headed.

In each of the last six cases since 2002, whenever EUR/USD broke above one of its three main long-term moving averages (55, 100 or 200 week MAs), it proceeded to break above the other two moving averages. With EUR/USD breaking above its 55-week moving average, it is set to cross above its 100-WMA (currently 1.3430) and 200-WMA (1.3533), which are 3.50% and 3.70% above the current market price of $1.3099. The road to $1.35 remains intact.

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Spain 10-year yields are down 50-bps, while Italian 10-year yields (BTPs) are seven-month lows below 4.80%.

Meanwhile in Greece, EU officials may finally approve the €31.5bn tranche of the €130bn rescue package. Even Germany is insisting that the remaining installment (originally due to be paid in June), will be released after ‘troika’ team complete its report on Greece’s compliance with reforms and austerity measures. One factor increasing the probability of Greece’s passing the “Troika Test” is the possible establishment of a special account for Athens to channel assistance from EU & IMF. The account will be strictly aimed at debt servicing instead of easing budget strains.

Italy 10-year yield breaks below key trendline. The 200-month moving average is also under assault. If this important moving average is not re-established below the yield by end of month, the follow-through to 4.50% is most likely as will likely be the case for 5% yield in 10-year Spanish bonos. Such are two of the main ingredients for $1.35 EUR/USD recipe.

By Ashraf Laidi, Global Strategist, City Index/FX Solutions

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