My mind is in certified holiday mode ahead of Thanksgiving Day so I’ll try to avoid thinking about the deserts my Wife has planned long enough to analyze Euro’s next move.

To state the obvious EUR/USD has entered a clearly defined consolidation triangle. The consolidation has narrowed to slightly over 100 pips suggesting a breakout could be coming, which way depends on who gains the fundamental advantage over the coming days.

Euro fundamentals are still respectable although they have cooled a bit allowing Greenback to punch back by posting among others, a 3.9% GDP growth. Last week it appeared the market was ready to turn dollar bullish for at least the short term until the Treasury Inflow Capital report suggested the world was making good on its promise to dump dollar as their preferred reserve currency. For an economy dependent upon debt buyers, this is clearly not a good sign.

Although dollar strengthened a slightly today, my guess is Euro fundamentals will not be anything special but U.S. fundamentals will be worse enough to fuel the EUR/USD through $1.48 on its way to $1.50.

U.S. Fundamentals Are Icky

I see the housing situation as a regional problem rather than a reflection of the economy’s state as a whole. While neighborhoods in California have entire streets in foreclosure, North Texas for example has rising house values and an optimistic future. The question becomes how much bleed over will the regional housing situation have on the American consumer nationally as companies affected by the housing situation downsize and lower revenue targets?

The Economist.com pointed out a $100 fall in real estate wealth eventually reduces consumer spending between $4 and $9 per household. Consider a Californian home owner who has lost $150,000 in real estate wealth over the last 12 months; if The Economist.com is correct that translates to a per household reduction in consumer spending between $6000 and $13,500. Combining the loss in home equity lending, a falling stock market, and rising oil prices you can see why retailers are already forecasting lower sales in the 4th quarter.

Consumers in the lower, upper class as well as home owners appear to be trimming back their spending already. Wal-Mart, Nordstrom and today Lowe’s turned in either lower than expected sales or lower same store sales for the 4th quarter and many are lowering their 4th quarter forecasts. American consumers may have spent their last line-of-credit dollars over the summer break. Finally, one statistic I find staggering is that household debt as a percentage of disposable income has reached 130%! How much more can the American Consumer charge and still pay their bills? I’m guessing not much considering credit card delinquencies are starting to rise as well.

So you see my point? Euro Zone fundamentals may be cool off but as long as they remain stable I don’t see the U.S. wining the fundamental battle anytime soon.

Nice Speech, So How do I Make Some Money on This?

I’m so glad you asked! Clearly I am dollar bearish but given the U.S. holiday and absence of U.S. fundamentals this week I would wait until next week to trade. I’m also not a fan of trading breakouts so if EUR fundamentals break the pair north of $1.47 I wouldn’t recommend chasing the breakout until it tests the $1.4752 high from the topside.

If you trade EUR at all this week, I would enter near support at the bottom of the consolidation range as illustrated in the chart below. Additionally, consider a smaller volume position this week because trading in thin volume can produce jumpy market swings, there is no need to expose your full capital this week.

Personally, I’m still long EUR from a trade I placed last week at $1.4570. I’ve already banked 84 pips on ½ of the position so my strategy this week will be to manage that trade.

Happy Thanksgiving and good luck!

-Ryan