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How Much Higher Can the Euro Go?

The Federal Reserve headquarters in Washington, DC.
The Federal Reserve headquarters in Washington, DC.

New bond-buying from the Federal Reserve could push the dollar lower against the euro, but one strategist recommends caution.

Ready for Fed Chairman Ben Bernanke's pronouncements? UBS's Shahab Jalinoos certainly is.

Jalinoos, a currency strategist at the Swiss bank, says his bank's economists expect the Fed to introduce a third round of quantitative easing, and commit to buying some $500 billion in assets.

In the currency markets, he adds, "typically the dollar tends to have fairly violent knee-jerk reactions to these kind of outcomes."

At the same time, the euro has been moving higher, most recently in the wake of the German constitutional court's blessing the bailout plan. (Read more: German Court Approves Bailout Fund, With Conditions)

Yet if you believe it's time to go long the euro against the dollar, Jalinoos suggests you may want to think again.

"The euro appears to have fairly large corrective rallies within its very big-picture down trend," he explains. "We've seen two of those in the past year" as markets awaited resolution to the latest chapter in the Greek debt crisis, and the European Central Bank's long-term refinancing operation. (Read more: What Is an LTRO Anyway?)

The problem, he says, is that "these rallies tend to fade out event when the market runs out of good news to trade off and tomorrow may be the culmination of the good news that the euro's had."

Jalinoos recommends selling the euro against the dollar, entering the trade at 1.3000 and setting a stop at 1.3120, with a target of 1.2500.

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