Euro Strength = Equity Strength

When I listen to financial commentators, I sometimes get the impression that the floundering US economic recovery has nothing to do with the issues facing this country (i.e., unemployment, deficits, lack of leadership, etc.). Rather, these commentators are quick to lay the blame on Europe as if the sovereign default risks in that part of the world are the only threat to our economic recovery. If the problems in Europe just go away, everything in the US will be fine. I doubt it is that simple, but then again people like to craft simple explanations to explain this complex beast known as the market. So if we can extrapolate, a rising Euro must mean only thing: a strong Europe. A strong Europe must be good for the US economy because if it wasn't for "them", we would have that economic recovery by now. And an economic recovery that is back on track can only mean one thing: buy stocks. While a cynical view, this is what is working now.

So it does appear that the Euro is reversing from its lows, but by no means does this represent a sustainable reversal. Figure 1 is a weekly chart of the EURUSD cross rate; I have shown this chart several times over the past months. Key pivot points are identified with the black dots, and positive divergence bars are identified in red.

Figure 1. EURUSD/ weekly

As expected, price is bouncing from the 1.16 to 1.19 support zone. The highs of the most recent positive divergence bar (red arrow) should serve as resistance; this coincides with resistance from the key pivot point at 1.25674. I can see the EURUSD trading to this level. Of course, what is good for the Euro is going to be good for US stocks, so it appears that equities are catching a bid and will likely run some more.

Figure 2 is a daily chart of the Currency Shares US Trust (symbol: FXE). Key pivot points are identified by the black dots. With today's price action, FXE is trading above the most recent resistance level at 122.29. FXE should trade to the next level of resistance at 126.12. This happens to coincide with the area where the down trend in the Euro accelerated or "fell out of the channel". This would be a likely area of selling, once again.

Figure 2. FXE/ daily

In summary, the Euro is bouncing. US equities are the beneficiary as all of the problems in Europe (and in this country too) have gone away. I suspect the Euro will run into trouble at the resistance levels I have identified. US equities may stall at these levels too as commentators look for other reasons why stocks should charge higher.

Lastly, I would be remiss in my analysis if I did not mention the US Dollar. What is good for the Euro is bad for the US Dollar. The Dollar is off its highs over the past week, and while I will save the details for another article, I view the current down draft as nothing more than a pullback within a longer term up trend.