Looking at the Euro Currency versus US Dollar we have to wonder why it didn't make a higher high above the late 2004 high this May when gold and copper and crude petroleum were making extreme new highs.
The obvious answer is that Europe also suffered from shooting star prices of crude commodity goods. And, to be sure, Europe still suffers from high unemployment relative to North America and has immigration problems, out sourcing "issues", etc.
Whatever the reason, the lack of an upside breakout denotes real weakness for EUR/USD, especially with commodities collapsing since May, along with US interest rates.
The chart merely documents that weakness. It shows a "head and shoulders" top whose traditional target is double the dxrop down to the "neck line" (thick red horizontal at about the 1.16 price level). The Fibonacci divisions of the EUR/USD bull market since 2001 demonstrate that the low exchange rate of late 2005 was at the 0.382 level, and the rally since went up to the 0.146 Fibonacci level. "Fibos" are beloved by currency traders worldwide. If the head and shoulders projection were to hold true, it would go to the .764 (2 * .382) level which is close to that other Fibo of .786.
Why am I saying these things when I am a long term inflationary bull? Because it has been five to seven years (from 1999 or 2001) for inflation, and let's face it: it got very wild in May. Commodity markets are just as crazy, or more so, than equity or interest rate markets, and they do not go in one direction for years and years without major corrections. Remember human nature?
Then there was my favorite: the formerly deflationist gold bug nut cases finally got to be inflationists again, as before 1997. They are perfect! (Now they will have to revive the bank conspiracies to explain why gold is going down when the world is such a bad place and should tank.)
It's just a normal correction, although it could look very nasty before it's over.
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