How 1987 DEM Lows Warn of a Collapse To 1.1876 in EUR/USD

The latest technical exchange rate forecast from Bank of America Merrill Lynch Global Research warns that there could be significant falls ahead for the euro dollar rate.

The euro exchange rate complex (EUR) has seen a relief rally set in following the October policy meeting at the European Central Bank.

A bounce has been expected for a while now as the euro was grossly oversold while the dollar is overbought. 

The ECB's October meeting sparked the latest rally - however, this article would suggest that these are merely good levels at which to enter a euro-negative and dollar-positive stance. 

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Forecasting a Decline to 1.18 Against the US Dollar

MacNeil Curry at Bank of America has taken a look at the euro dollar and using historical Deutsche Mark data he foresees significant losses ahead:  

"We are US $ bulls (long the Greenback against both £ and MXN), but yesterday's short-term signs of stalling failed to materialise.

"Indeed, €/$ has fallen sharply and is on track to test the confluence of long-term support at 1.2470/1.2450. This has been a pivot since December 1987 (yes, 1987, so we are using $/DEM data pre-1999 - where DEM are German Marks, this in itself reflects just how central Germany is to the modern day euro)."

Curry concedes that While this zone may prove sticky, it should only be a temporary stopping point.

In his opinion the euro dollar exchange rate is on track to push to 1.2292/1.1876 (200m MA and Jun'10 low), and likely below.

"Back above the 6wk channel base (now 1.2813) is needed to warn of basing," says Curry.

But Beware the Rebound

Of course no currency movement exists within unadulterated straight lines, as such we should be wary of corrective bounces.

Karen Jones at Commerzbank says:

"EUR/USD has eroded the 1.2661 November 2012 low. We are surprised to see the market continue to tumble at this juncture but with the chart dominated by the 2 month downtrend the outlook remains bearish, this is currently located at 1.2801.

"Some caution is warranted very near term as we have a 13 count and a TD perfected set up, both warn of a possible rebound and we would prefer to sell the rallies."

Commerzbank's trade recommendation is to sell rallies to 1.2750, and add 1.2800, stop 1.2845.