If You Have Euro-Backed Assets You'd Better Sell Them Right Now

NEW YORK (Best Credit) -- Over the last few weeks, currency markets have seen some abrupt changes from what's been seen most of this year. The main trends in the U.S. dollar have been bearish while most of the activity in the euro has been positive.  

The EUR/USD forex pair came close to breaking 1.40 at its highs. But when we look at the fundamentals of both economies, this trend momentum has been highly questionable. The divergences between valuations and economic data help explain why the rally was followed by a strong reversal, which could be what ultimately defines the dominant trajectory for 2014.  

Important issues like GDP figures, regional unemployment rates and dovish European Central Bank policy should continue to provide headwinds for those bullish on assets backed by the euro.  

So if you have euro-backed assets, the outlook isn't good.

Chart activity helps to confirm this bearish outlook. The latest EUR/USD technical analysis report at ForexAbode highlights a variety of warning signals that should be watched.  Perhaps the most closely watched factor discussed is the downside break of the 200-day moving average, which ultimately suggests that bearish momentum currently defines the market.  

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Courtesy of CornerTrader

On the data side, the European Central Bank still has a series of issues that have not been totally resolved since the region's sovereign debt crisis was commanding a significant portion of the market's attention.  

Some of the region's most heavily indebted countries (Greece and Spain, for example) continue to create a significant drag on the economic prospects for the region as a whole. Annual GDP rates suggest the eurozone is still at risk of falling back into recessionary conditions. The national unemployment rate in Greece hit highs of 28% before falling back to 26.5% for the month of February.  

Trends like this are alarming, to say the least.

There has been little progress in resolving the issue of chronic joblessness, the ECB faces some economic hurdles that will be difficult to overcome before the end of this year. The ECB has been pretty good in verbalizing both its concerns and the potential course of action as we move into the second half of the year.  

At this point, it looks relatively clear that the ECB will be looking to introduce new policy measures that are even more dovish and designed to stimulate the region's lagging economies. Stimulus programs generally lead to selling pressure in the related currency, so if we do see more announcements in this direction from the ECB, the euro is unlikely to find support from currency investors.  

Watching Currency ETFs

Of course, not all traders are focused on forex market but these trends can still be visualized using exchange-traded funds.  

Popular choices for these currencies can be found in the PowerShares DB US Dollar Index Bullish ETF (UUP) and Guggenheim CurrencyShares Euro Trust (FXE). Both of these ETFs track the values of their respective currencies against important global counterparts, so it might be easier for investors to watch for developments here rather than to watch for price moves in specific currency pairs.  

In any event, be on the lookout for further declines in the euro because the technical and fundamental pictures point toward a bearish outlook.  

A good portion of the eventual trend development will depend on the extent to which the ECB is willing to ease monetary policy and ignite the growth engine in the eurozone's struggling countries. There are still some real, systemic problems with the region because there is not much that resembles economic cohesion in the eurozone.  

As long as this continues to be the case, the ECB will be more likely to act in ways that will have a negative effect on the currency. Assets backed by the euro should underperform in the second half of the year.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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