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Neckline Break May Send Euro to 3-Month Low: Technical Analysis

The euro may fall to a five-month low versus the dollar after breaking the neckline of a bullish head-and-shoulders chart formation, according to Bank of America Corp.

The 17-nation currency breached the neckline around $1.30 and may weaken to $1.2662, the lowest level since Nov. 13, said MacNeil Curry, chief rates and technical strategist at Bank of America Merrill Lynch in New York, by phone. Signs of euro-zone economic weakness also back the bearish short-term trend, he said.

“The European peripheral debt market has turned to the bearish side and equities are coming down,” Curry said. “We’re in a negative environment for the euro. It has lower to go.”

After weakening to $1.2662, the currency may resume its “larger bull trend” and strengthen, Curry wrote in a note to investors yesterday.

The shared currency fell 0.6 percent to $1.2979 per euro in New York trading, after dropped to $1.2967, the lowest level since Dec. 11. The euro’s 14-day relative strength index versus the dollar approached 30 today, a level that may signal an asset has fallen too far, too quickly.

The difference between generic two-year Italian and German bonds is 191 basis points, or 1.91 percent, after narrowing to 117 basis points Jan. 17. The differential between Spanish and German debt is 246 basis points, rising from the Jan. 11 low of 1.99 percent.

The Euro STOXX 50 index fell 1.1 percent today and has dropped 4.9 percent since its recent Jan. 30 high. Stocks have declined as measures of manufacturing in the U.K. dropped and a report showed euro-area unemployment has climbed to a record high.

“If you are betting on the euro simply being oversold you’re going to be taken out in a casket,” Tom Fitzpatrick, chief technical analyst at Citigroup Inc. in New York, said in a telephone interview. “Just as a market can remain irrational longer than you can remain solvent, a market can remain overbought longer than you can remain solvent.”

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