The long-term picture

The bear market of the EUR against the USD ended in March 2002 (1). At that time, the down- trend was decisively broken and gave way the new EUR-bull.

From the low of 0.856 reached at the beginning of 2002, the EUR rose to 1.0206 by June 15, an amazing increase of value by 19%. A lengthy correction followed which was only resolved to the up-side at the beginning of December of the same year.

The rise that followed this correction lifted the EUR to 1.1066 by March for another increase in value by 15%.

Another consolidation followed, this time of shorter duration.

After the break out of this consolidation which occurred at the end of April, it is now mainly a question of how fast the EUR will move to 1.20, the area of the next major resistance level. If the two previous major advances can serve as any guidance, they suggest that it may not take longer than a few weeks.

The medium-term picture

When major resistance areas are overcome (see 2 and 3 beow), very often these break-outs are followed by strong movements as these break-outs are closely watched by trend-followers.

Currency analysts which hoped for one more correction down to 1.05 are proven wrong and readjust their strategies so as not to miss the next important move.

As a result, set-backs are used to build positions and are quickly reversed for this reason.

One thing is clear: for the time being, the major trend for EURUSD is UP.

The short-term picture

Short-term, it is evident that we have had a major break-out at the end of April at the level of 1.1083.

We however also see that in the up-trend channel which started at the beginning of April, we are at present in bit overextended.

The day-trader may therefore wish to wait for a pull-back towards 1.1150 before entering new commitments.

Is the USD still fundamentally overvalued?

In October 2000, the EUR fell to 0.82 against the USD and has since risen to 1.12. This is a stunning increase in value of the EUR of 36%.

Markets tend to go from oversold to overbought and purchase power parity calculations have little influence on currencies movements in the short-term.

But as long as basic economic imbalances like the huge trade and budget deficits the USA carries, the down-trend of the USD is unlikely to change.

Furthermore, the more the dollar falls, the more investors get scared and gloomy for which reason we see little reason for a dramatic trend-change.

The following recommendations were valid at the time of writing, viz. at

Peter Zihlmann, www.pzim.com, or email to forex@pzim.com

May 5, 2003