When EUR/USD broke 1.0877, price cleared every monthly average and every significant point from 1 to 62.4 years. To offer context, 62.4 years is 749 months and dates to 1953. Point 1.0877 V USD 0.9185 were opening prices January 1971 when exchange rates began to free float. The same scenario held last Thursday.
From a cyclic perspective, the 2008 crash marked the end of EUR/USD’s 10 year periodic rise in favor of USD ascendancy and now in its eighth year as of August 2016. The current cycle since 2008 began at EUR/USD 1.4734 – 1.0877 for a 3857 pip drop, minus 26.1% and an average cycle line at 1.3090. The last cycle from the August 1998 Russian ruble crisis to August 2008 began at EUR/USD 1.0915 to 1.4734 for a 3819 pip rise, + 34.9% and an average line at 1.1478. From August 1997 Thai baht to August 2008, EUR/USD rose from 1.0603 to 1.4734 for a gain of 4131 pips, + 38.9% and an average line at 1.1429.
Cycles are warning not only EUR/USD multi-year turning points are close but 2016 could mark the beginning of a polymorphic annual rampage higher. Near term based on 17 averages from 1 to 62.4 years, the parity scenario appears extremely viable since this downtrend is just beginning and has light years to travel. Two problem averages exist in the mix, 7 and 10 year. At 1.3090 and 1.3260, both are oversold yet both averages can take EUR/USD to 1.0090 and 1.0059 before price becomes severely oversold.
Remainder averages from 1 to 62.4 have a long way to go before oversold becomes a concern. Averages from 35 to 62.4 years actually forecast EUR/USD far below parity to the mid to upper 0.9000’s while averages from 15 to 30 year forecast lows at 1.0439 and 1.0405. Between cycles and long term oversold averages, EUR/USD enters a dangerous trading period ahead.
Fundamentally, from the Dec 30 money supply figures released by the ECB, both M3 and M1 decreased. M3 growth rates decreased 5.1% in November from 5.3% in October. M1 decreased 11.2% in November from 11.8% October. Last time M1 saw such a massive drop for the October – November period was 2009 when M1 annual growth rates dropped 12.39% in December from 12.5% in November. Previous years saw increases in both M1 and M3. More work is needed in this area but a continued restriction of the money supply would warn the EUR turn is upon us.
Inflation based on annual averages from 2015 – 1997 warns the ECB’s 2% target remains challenged as the average at 1.79 encompasses a target of 0.95 and a bottom at minus 0.78. Monthly averages from November 2015 to September 2014 also warns the 2% target remains a conundrum as the target is minus 0.60. Points 0.01 and 0.07 must clear higher in order to see Inflation rise. Failure for Inflation to head higher would see EUR/USD lower for longer. Volatile Food, alcohol and tobacco make up 20% of the ECB’s Inflation Index while energy comprises another 10.6% to account for 1/3 of the total. Services and Non Industrial goods account for the remainder index. A further restriction of M1 if the trend continues and if a trend actually exists is enough to lift Inflation.
EUR/USD must clear 1.0954 and 1.1003 to head higher. Then comes tons of resistance points beginning with the 62.4 year average at 1.1088, 60 year at 1.1112, 55 year at 1.1220, 50 year at 1.1376, 45 year at 1.1585, 40 year at 1.1659 and 35 year at 1.1559. Above 1.1659, EUR/USD challenges the 1.2000′ beginning with the 30 year average at 1.2024.
The further break of 1.0877 offered the first clear sell signal from interest rate models as those models were clearly neutral after the Draghi and Yellen cuts. And accurate. Once 1.0900’s achieved, prices sloshed around for weeks.
The near term ECB view in my estimation and based on models is EUR/USD achieves parity and remains lower for longer inside a 1.0000 – 1.1088 range until the formal cycle break occurs. It's not in the ECB’s interest nor do I believe they want another 1.2000 EUR/USD.