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Is the Euro Oversold?

Thursday, 24 May 2012 | 2:54 PM ET
Johner | Getty Images

The euro's nosedive is taking it to levels where some are wondering if a reversal is at hand.

In the G-10 world, it's not easy to find a place with more problematic fundamentals than the euro zone.

What with the ongoing Greek drama, political leaders at loggerheads, and economic deterioration spreading even to mighty Germany, it's hard to find hopeful signals for the euro.

But they're there.

For starters, net short positions on the euro are enormous, which means that any spark of good news or bullish signal could spur a wave of short covering that would lift the currency. Also, says Camilla Sutton, chief currency strategist at Scotia Capital, the euro's relative strength index, or RSI, is at 21, which suggests the currency is oversold. "Typically once the RSI falls this low EUR recovers (at least temporarily) relieving the downward pressure on the RSI," she said in a note to clients.

Sutton notes that there are other technical indicators still sending bearish signals. "A sustained rally is unlikely," she says. "However a short period of retracement could easily materialize, especially as markets have already priced in a fairly bleak scenario for Greece. We hold a year-end EUR target of 1.25 and do not expect a EUR collapse."

Food for thought.

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