The euro’s drop in the past month has pushed the currency through key levels on a so-called ichimoku chart, indicating its decline may continue to $1.25 next year, Bank of America Merrill Lynch said, citing trading patterns.
The common currency reached a nine-month high of $1.4282 on Nov. 4, climbing from $1.1877 on June 7, the lowest level since March 2006. The currency broke below the bottom of an ichimoku cloud chart at the $1.3374 level, and its shorter-term conversion line crossed below its longer-term baseline. It also fell below $1.3080, which represents a 50 percent Fibonacci retracement of a rally from June to November.
“After the euro successively broke below key ichimoku and Fibonacci levels, the momentum is clearly downwards,” said Tomoko Fujii, a senior foreign-exchange strategist at Bank of America Merrill Lynch in Tokyo. “With the declining trend likely to continue at least for several quarters, the euro will target the four-year low reached in June.”
A level of $1.2796 “naturally comes into sight,” as it’s a 61.8 percent decline from last month’s peak, with the next key level a $1.2445, a 76.4 percent change, Fujii said, citing percentage changes predicted by the Fibonacci sequence. The euro may fall below $1.25 early next year at the earliest and by the middle of next year at the latest, she said.
The currency has been the worst performer against the dollar so far this year after the Danish krone.
Ichimoku charts are used to predict a currency’s direction by analyzing the midpoints of historical highs and lows. The conversion line plots the sum of the highest high and lowest low over the past nine trading days. The baseline is the same calculation over the past 26 days. The cloud refers to the area between the first and second leading span lines on the chart and is used to show an area where buy orders may be clustered.
Fibonacci analysis is based on the idea that asset prices reach peaks and troughs at specific percentages of previous trends in the chart.
In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.