NEW YORK (TheStreet) -- There has been much debate over the past few months over the differing states of economic progress in the U.S. and the eurozone.
The U.S. is viewed as being in a gradual recovery, while the European region is seen as just now bottoming from its recessionary downtrend.
The fundamental differences have led many to project diverging policy outlooks for both economies. Many believe that the Federal Reserve is more likely to tighten its accommodative monetary policy sooner than the European Central Bank.
Based on the price action below, investors can gauge where the market is setting up to go in the near future.The first chart is of CurrencyShares Euro Trust (FXE) over PowerShares DB US Dollar Index Bullish (UUP). This pair has traded within a wide range over the past three months, essentially feeling out levels at both the highs and lows of the year. Although it is expected that the Fed will begin to tighten policy first, investors are still unsure about the exact date at which the Fed will change policy. Based on this uncertainty, both the dollar and euro have received heavy inflows and outflows. The euro is currently trading at its multimonth highs and has run into strong resistance levels. It's already August, and many believe the Fed will begin tapering in September, so the euro could pull back over the next few weeks. Look for further strength in U.S. economic data to push the euro lower, because strong data will give investors more conviction about a September tightening. The next chart is of SPDR S&P 500 (SPY) overiShares S&P Europe 350 Index (IEV). As the euro has strengthened relative to the dollar, so have European equities outperformed U.S. indices. European large-caps have received a strong bid vs. U.S. equities as European economic data have been relatively strong and uncertainty over the future value of the dollar has pushed U.S. equities into a consolidation pattern. This pair looks to be reaching levels of support, but it is unclear whether the pair will continue to trend lower or whether potential volatility could prompt investors to push more of their funds into the U.S. market, which is perceived to be a safe haven.
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