Euro to Fuel Year-End Gold, Equity Rally

Tuesday, December 01, 2009

Midway through last week, the euro hit a new high for the year against the dollar at $1.51439. The momentum trade looked promising but a surprise was in store. Over the Thanksgiving holiday, Dubai announced its need to delay repayments and restructure its debt. A significant flight to safety ensued with the dollar and Treasuries rallying while nearly every other asset class around the world dropped sharply. This action put a large upside tail in the weekly candlestick charts typically representing a failed breakout in prices.

Yet, most markets rallied back on Friday as fears of contagion calmed and the euro followed suit. Over the weekend, the euro continued bouncing back and reclaimed the psychological $1.50000 level after falling as low as $1.48278 Friday morning. This nearly immediate rebound to highs shows compelling strength in the currency. Now, the euro has no significant resistance above $1.50000 until the $1.55000 area indicating that a quick rally may be coming. So, what does all this mean for the short-term trader?

The dollar has been the most important indicator to follow for traders this year. A rallying euro results in a lower dollar making dollar-priced assets cheaper for Europe. The correlation has been extremely strong and is likely to continue. A strong clearance by the euro through this resistance level will likely fuel a year-end rally in gold prices and US equity markets.


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