Many traders ignore the currency market.
They find it confusing… They’re not sure how it all works or what drives the underlying market.
But that’s a mistake. Currencies are the biggest market in the world, and they offer one of the most active and profitable spaces for traders to explore.
And a good place to start when you’re new to forex (FX) is the U.S. dollar.
Rather than buying shares of Apple (AAPL) or Microsoft (MSFT), you can speculate on the movements of the dollar versus other currencies.
So if you thought the euro was going to strengthen against the U.S. dollar, for example, you could trade an ETF like the Invesco CurrencyShares Euro Trust ETF (FXE).
Major Trends
There have been some clear long-term trends in FXE.
From 2019 through early 2020, FXE steadily fell. That meant that the euro was weakening against the U.S. dollar.
But around April 2020 that all changed:
Invesco CurrencyShares Euro Trust ETF (FXE) – Weekly Chart
Source: e-Signal
When the Fed started cutting rates quickly in response to the pandemic, the euro rallied strongly against the U.S. dollar.
FXE’s up move coincided with two bullish technical signals…
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The Relative Strength Index (RSI) broke through resistance (green line) and tracked in its upper range.
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The 10-week moving average (MA, red line) crossed above the 50-week MA (blue line) and started to accelerate higher.
However, after peaking in early 2021 (‘A’), FXE rolled over as momentum waned. As the chart shows (red line), the RSI steadily dropped into its bottom half, dragging FXE lower too.
That fall sped up when the Fed abandoned its near-zero interest rate policy and began to quickly tighten rates.
As we saw when we checked it out in April (red arrow), FXE lost 24% by the time its 18-month downtrend bottomed out in September last year (‘B’).
Take another look:
Invesco CurrencyShares Euro Trust ETF (FXE) – Weekly Chart
Source: e-Signal
But like any other market, FX also overshoots…
With the RSI rallying out of oversold territory (lower grey dashed line), FXE’s downtrend reversed.
FXE’s emerging rally began with the RSI breaking into its upper band and the 10-week MA crossing above the 50-week MA.
That strong move saw FXE recently trading at its highest level since February 2022.
But that rally is about to test a key level. So what am I looking for around here?
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Bounced Off Support
You can see on the chart that FXE has made a series of higher highs this year at ‘1,’ ‘2,’ and ‘3.’
FXE retraced from each of those peaks when the RSI formed an inverse ‘V’ and reversed from overbought territory (orange circles).
But that reversal in momentum was unable to penetrate through support (green line).
Instead, in February and late May, the RSI bounced off that support level, sending FXE back higher.
As the chart shows, the RSI is retesting that same support level for a third time (orange arrow).
If the RSI holds that level and bounces higher, FXE will also likely break higher.
The next test for FXE’s uptrend is to make a new higher high at what will become ‘4.’
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. The euro is currently rallying against the U.S. dollar, but that’s not the only pressure the U.S. dollar is under.
An even bigger factor is unfolding that could ultimately dethrone the dollar’s reserve status…
Tomorrow, August 22, Brazil, Russia, India, China, and South Africa (the so-called BRICS) are meeting to discuss how to bypass the U.S. dollar.
And that has major ramifications for global trade – and the overall strength of the U.S. economy too.
Yet if you’re prepared for this shift, you can not only protect your hard-earned money… but grow it over the coming year.
I recently shared all about this situation at a special summit. So if you’d like to find out how to trade what’s coming, then please click here to learn more.