NEW YORK (TheStreet) -- The U.S. dollar has gained more than 20% and the euro has lost more than 20% since May 2014.

Earnings from iconic U.S. blue chip companies life Pfizer, P&G and Microsoft have shrunk due to the mighty dollar. Microsoft, for example gets nearly three quarters of its revenue from overseas. Last quarter, that revenue was worth up to 20% less relative to the dollar.

Multinationals warn of weaker 2015 earnings as they expect dollar strength to continue.

Furthermore, the European Central Bank just announced European QE. In other words, the ECB will essentially print euros and devalue the eurozone currency.

What possible reason could there possibly be for the euro to rally? How about this one: There simply no more sellers left.

Let's look at three key driving forces:

  • Investors Sentiment
  • Technical Analysis
  • Seasonality
Investor Sentiment

There are different ways to gauge investor sentiment. One of the most prominent sentiment gauges for currencies is the Commitment of Traders Report.

The COT is released by the Commodity Futures Trading Commission every week and provides a breakdown of traders' positions in futures contracts.

Traders are divided into three categories.

  • Commercial
  • Non-commercial
  • Non-reportable

Commercial traders are usually hedgers and insiders and considered the "smart money." Non-commercial traders are large speculators, like trend-following hedge funds. Non-reportables are small retail investors.

The first chart shows what non-reportable and non-commercial traders are doing right now. This cohort of traders is aggressively selling the euro. Similarly aggressive short positions have foreshadowed major lows in the past (see dashed green lines).

The second chart shows that the 'smart money' is aggressively accumulating euros. Commercial traders are often early, but they are usually proven correct eventually (dashed green lines).

Investor sentiment suggests that the euro is at or close to a tradable low.

Technical Analysis

We could spend hours talking about technical analysis. Here's just one factor worth considering:

The grey parallel lines shown in the charts above form a technical trend channel. The euro has reached the lower part of that channel. This channel serves as technical support.

The trend channel doesn't guarantee that the euro's demise will stop here, but the odds of a trend reversal are better now than they've been in many weeks. Technical support levels are like traffic lights. A traffic light doesn't automatically mean stop, but if you're going to have to stop it will probably be at a light.

A break below that trend channel, would unlock lower targets. Next 'traffic light' is probably around 1.10.


Euro seasonality is not yet bullish. In fact, seasonality would allow for further losses into May. Seasonal strength begins in May.

However, the euro decline since May 2014 did obviously not conform to seasonality, so any upcoming rally may not either.


The high probability, low-risk trade based on an analysis of investor sentiment, technicals and seasonality is to buy the euro with a stop-loss around 1.10.

The easiest way to gain exposure to the euro is via the CurrencyShares Euro ETF  (FXE - Get Report) .

Some investors prefer to use leveraged ETFs, because currencies moves tend to be smaller compared to other asset classes. Leveraged euro ETF options include the ProShares Ultra Euro ETF (ULE - Get Report) and Market Vectors Double Long Euro ETN (URR) .

Currently, ULE and URR have only negligible trading volume, another indication that investors have no interest in shorting the euro.

This article is commentary by an independent contributor. At the time of publication, the author held FXE.