LONDON, 6 October 2005 — The euro has leaped over a series of obstacles on technical trading charts during the previous week, gaining three cents against the dollar and triggering speculation about whether and when it will rise to new highs.
Were Europe’s single currency to maintain its recent breakneck pace, it could reach its highest ever level against the dollar this month, rising above the $1.1930 record level set this summer from Thursday’s $1.17.
Beyond that, technical analyst say, it would be aiming above $1.2100, a 61.8 percent retracement of the dollar’s rise between the summer of 1995 and late 2000 on synthetic charts and well into the pain area that European exporters are fearing.
Synthetic charts give a value of the euro calculated from its constituent currencies before its launch on Jan. 4, 1999 at $1.1747.
“Having taken all the retracement levels and recovered back above $1.1630 the next big level is $1.1930. I think the test of that level will probably come before the end of the month,” said Phil Roberts, technical analyst at Barclays in London. “There are not that many key levels there before.”
However, the euro fell back sharply against the US dollar here on Friday. The euro was at 1.1593 dollars, against 1.1691 dollars in New York on Thursday. Analysts said it was still too early to say if the dollar’s recent slide has been reversed.
Earlier this week, the euro retraced 78.6 percent of its fall from the summertime record highs to the subsequent multi-month lows at $1.0760. Analysts said this $1.1625/80 band was the key obstacle before the currency tested its record highs.
Many of them believe this retracement level is particularly tough to crack and therefore sends a strong signal for further continuation of a trend once broken.
Other, smaller obstacles on the way to establishing new record highs lie just above $1.1800, which is the top of the latest channel on the euro’s way up, chartists said.
But many analysts also say that, at least for now, the possibility of taking the euro to its highest levels since its 1999 inception may put some market players off.
“I am about 60 percent in favor of the market failing at these levels (record highs),” said Karen Jones, technical analyst at Commerzbank in London.
Fundamental analysts argue that in the short term the dollar will be under pressure against the euro from disappointing US economic data, where weak labor markets are threatening to undercut consumer spending.
Over the longer horizon, even if the US recovery manages to produce more jobs and take pressure off consumers, the country’s gaping current account deficit could provide further pressure on the dollar.
This could mean that, one way or another, the euro may score new highs against the dollar and head into territory charted only by synthetic graphs describing its assumed moves before 1999.
“There is a sense the market is aiming above $1.1930 and if that level was broken, people would be making even bigger bets against it,” said Gerry Celaya, technical analyst at Redtower Research.
“$1.20 would be the next psychological level, and then $1.2120, the 61.8 percent Fibonacci retracement of the move from 1995 to 2000. A lot of people would be even thinking of levels above $1.40,” he said.
“Fibonacci retracements” are derived from the work of a 13th century Italian mathematician, Leonardo Fibonacci, who discovered mathematical sequences which financial analysts believe can be used to pinpoint trading levels to which markets naturally gravitate.
According to Reuters calculations, the dollar rose from $1.35 against a synthetic euro in the summer of 1995 to the singe currency’s life low around $0.82 three years ago in October 2000, before embarking on its latest downfall.
Before 1995, when the US began claiming to have a “strong dollar” economic policy, the dollar rose as high as $1.46 per euro in September 1992. But chartists also said the dollar may soon find chart support, before trying to retrace its three-year decline. “I think the dollar will find buyers near where we are,” said Celaya. “We may even go back to the big level at $1.1535.”
Jones added “The dollar now has huge levels of support against all major currencies. And I do think it is going to reverse.”