The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.By Marc Chandler NEW YORK ( BBH FX Strategy) -- 1. As the world took a step away from the proverbial abyss with the firming of the U.S. economy and the European Central Bank's massive liquidity injections in the first quarter, the dollar suffered.
4. In addition, there are a number of political events that pose risks to the euro over the next several weeks. Greece and France hold national elections. In Greece, it is not clear that the current coalition of the Panhellenic Socialist Movement and New Democracy is going to secure a majority, warning of possible concessions to less pro-European smaller parties. In France, although the first round appears to have tightened, Francois Hollande still enjoys a large lead in the all-important second round. Italy will hold municipal elections next month, and they will be seen as a referendum on technocrat Prime Minister Mario Monti, whose public support has waned since his push to weaken the infamous Article 18, which ossified the Italian labor market. Germany holds two state elections, which should not be much of a market factor. Further erosion of support for the Free Democratic Party increases the likelihood that next year's national contest produces another Grand Coalition between the Christian Democratic Union/Christian Social Union and the Social Democratic Party. Although Irish referendums have had market impact, this time that is likely to be different. The polls show that a comfortable majority favors approving the fiscal compact. In addition, unlike other referendums, the fiscal compact is to be decided by a qualified majority, which means the unlikely veto would not derail the compact but simply cut Ireland off from further aid, should it be necessary. Lastly, we note that the Dutch government nearly collapsed last week, and while it survived, it has yet to resolve the underlying budget problem. 5. The technical support for the euro has weakened considerably. The breakdown has followed the repeatedly unsuccessful attempts to push through $1.34. The measuring objective of what may be a double top is near $1.3100, but the bottom end of the euro's trading range is closer to $1.2975-$1.3000. The five-day moving average is poised to fall below the 20-day moving average, indicating that short-term trend followers and momentum players are likely to be more inclined to sell rather than buy the euro. Although this signal has whipsawed participants in recent weeks, it does have a good record of catching big moves.
The lower end of the euro's trading range is also seen by some technicians as the neckline of a larger head-and-shoulder's topping pattern, which if broken projects toward $1.25. Based on current spot and volatility levels, indicative pricing suggests almost a 50% chance of testing the mid-January low near $1.26 here in the second quarter. 6. We have often found that the euro is sensitive to changes in the interest rate differential between the U.S. and Germany. In the past, a flare up in the European debt crisis has led to safe-haven flows into Germany, pushing down its interest rates and widening the differential in the U.S.'s favor. Although we have highlighted the risk of the re-emergence of eurozone tensions, growth differentials also seem to be fueling a widening of the interest rate spreads. The 10-year spread is at its widest level since mid-2010. The two-year differential is near its best levels since then, having risen from about 2 basis points after a seemingly dovish talk by Federal Reserve Chairman Ben Bernanke near the Ides of March to 17 basis points earlier Wednesday. 7. The correlation between the euro and the S&P 500 (60-day period on percent change) has fallen nearly in half from a record high in early December of 0.85 to 0.43 in late March. The correlation has begun stabilizing, as has the 30-day correlation. Short-term market participants should be prepared for a tighter correlation in the second quarter.