I’ve been going on and on about the continued weakness in Europe, and how I feel that it will most certainly come to “bite us in the ass” again, and again in the coming year. Spain’s issues are much more serious than the current market action reflects – and the ECB has been doing a lot of talking with very little action. Yes bond yields are down across the board and for the time being it “appears” that things have steadied / leveled off however – bubbling there underneath the surface is a complete and total financial disaster. I guess….. for those who believe that now ” endless printing” (so far yet to be seen) by the ECB will magically paper over the holes – fair enough, as this seems to be the current “accepted course of action”.
But make no mistake – the problems in Europe are far from over. Now…that being said ” lets go buy some Euro’s”!
In currency markets – there are many instances when the “fundamentals” do not come close to lining up with the “technicals” – but short term trade set ups do ideed exist. I generally approach these trades with smaller position size, and pre-determined stops – in order to set my emotions aside, and just allow the trade to work. Another small suggestion would be to place orders “well above” the current price action, and let the trade come to you.
Reading Between the Lines: Why Europe’s House of Cards Still Stands
The ECB’s Verbal Gymnastics vs. Market Reality
Here’s what really gets under my skin – the ECB keeps talking about “whatever it takes” while their actual balance sheet expansion remains laughably modest compared to the Fed’s money printing circus. Mario Draghi can jawbone all he wants, but when push comes to shove, the Germans are still calling the shots behind closed doors. This creates a massive disconnect between what the market thinks the ECB will do versus what they actually can do politically. Spain’s 10-year yields sitting around 5.5% might look “manageable” to the casual observer, but consider this – they need to roll over €200 billion in debt next year alone. That’s not pocket change, and it’s certainly not sustainable at current borrowing costs when your economy is contracting at a 1.5% annual rate.
The real kicker? Italy’s sitting there like a ticking time bomb with €2 trillion in outstanding debt. Monti’s technical government bought them some breathing room, but political uncertainty is about to rear its ugly head again. When EUR/USD rallies above 1.31, it’s not because Europe fixed its problems – it’s because traders are betting the ECB will eventually be forced into unlimited bond purchases. That’s a dangerous game of chicken with the Bundesbank.
Currency Correlations That Actually Matter
If you’re going to trade this Euro strength against the fundamentals, you better understand what’s really driving these moves. The EUR/USD isn’t trading on European growth prospects – it’s trading on relative monetary policy expectations and safe haven flows that make absolutely zero sense. Watch the EUR/JPY cross like a hawk. When European risk is truly off the table, this pair should be grinding higher consistently. Instead, we’re seeing choppy, unconvincing moves that scream “short covering rally” rather than genuine confidence.
Here’s a trade setup that makes sense within this framework: EUR/GBP offers a much cleaner technical picture for a short-term long position. The UK’s own austerity-driven recession gives the Euro a relative advantage, and the pair has been consolidating in a tight range between 0.7850 and 0.8050. A break above 0.8020 with volume could target 0.8150, but I’m not holding this trade through any Spanish bond auctions or German court decisions on ESM legality.
Spain’s Real Numbers Don’t Lie
Let’s cut through the political spin and look at what’s actually happening in Spain’s economy. Unemployment just hit 25% – that’s not a recession, that’s a depression. Their banking sector needs at least €100 billion in recapitalization, and that’s using the most optimistic stress test scenarios. The regional governments are basically bankrupt, with Catalonia and Valencia already begging Madrid for bailout funds they don’t have.
Meanwhile, Spanish property prices continue their relentless decline, down another 15% year-over-year in major markets. This creates a vicious feedback loop where bank balance sheets deteriorate faster than they can be recapitalized. Every month that passes without a comprehensive solution makes the eventual reckoning more expensive and more politically toxic. The market’s current pricing assumes Spain muddles through without a full sovereign bailout – I think that’s naive.
Trading the Inevitable Reality Check
When this Euro rally runs out of steam – and it will – the move down is going to be swift and brutal. The smart money isn’t buying EUR/USD at 1.3150 hoping for 1.3500. They’re positioning for the eventual breakdown below 1.2500 when reality crashes the party. But timing that move is the million dollar question.
My approach? Use any EUR/USD strength above 1.3100 to establish small short positions with stops above 1.3250. Don’t get cute trying to pick the exact top – this market can remain irrational longer than you can remain solvent. Scale into the position as the technical picture develops, and keep your powder dry for the real fireworks when Spanish borrowing costs spike above 7% again.
The fundamentals haven’t changed – Europe is still broken, Spain is still insolvent, and the ECB is still hamstrung by German politics. This rally is a gift for those patient enough to wait for better entry points on the short side.