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Triangle Vectors Euro Down From 2 1/2-Year High

Whether or not the European Central Bank decides to add stimulus tomorrow, trading patterns show the euro is headed for a decline.

After a failed attempt to rally through $1.40 last month, the 18-nation currency closed at $1.3629 on May 23, below its 200-day moving average, opening the way for further losses, according to Commerzbank AG. The euro also broke below the base of what’s known as an ending diagonal triangle, a chart pattern reflecting narrowing price moves made up of two converging trend lines, which confirms a reversal of the bullish move that started on Nov. 7, Bank of America Corp. said.

“The break below the base of the triangle came in roughly $1.37,” MacNeil Curry, a technical strategist in New York at Bank of America Merrill Lynch, said in a phone interview yesterday. “We’re going to see a move down to $1.33, the November low, which is the beginning of the formation.”

The euro rallied 5.2 percent from its low on Nov. 7, when the ECB cut its refinancing rate to a record 0.25 percent, to a 2 1/2-year high of $1.3993 on May 8. It has retreated more than 2 percent from that level, reaching $1.3615 as of 12:33 p.m. in New York, after sluggish economic growth and below-target inflation led ECB President Mario Draghi to foreshadow added stimulus at tomorrow’s policy meeting.

The shared currency will weaken to $1.32 by year-end, according to a Bloomberg survey of analysts and economists.

Market Forces

The currency’s strength this year has been traced to capital inflows into the region’s equity and bond markets, and a current-account surplus. In the run-up to last month’s high, it defied analysts’ calls for a decline as the euro area’s economic growth trailed that of the U.S., the U.K. and Japan.

Hedge-fund managers and other large speculators haven’t been this bearish on the shared currency in more than 10 months. The difference in the number of wagers on a decline in the euro compared with those on an increase, known as net shorts, totaled 16,633 contracts on May 27, the most since July 23, according to data from the Commodity Futures Trading Commission.

Investors remain concerned that interest-rate cuts alone aren’t enough to weaken the euro further. The currency rose as much as 0.4 percent to $1.3648 yesterday even as data estimated the rate of inflation slowed to an annualized 0.5 percent in May, from 0.7 percent the previous month.

“Having broken recently below the 200-day moving average, any rebounds are likely to remain tepid,” Karen Jones, a technical analyst at Commerzbank, wrote in a report yesterday. “Beyond a small rebound, we would allow for further losses to the $1.3476 2014 low en route to the 2012-2014 uptrend at 1.3425.”

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