Weekend elections in Austria and Italy sparked increased activity for the euro and put the CurrencyShares Euro Currency Trust (NYSEArca: FXE) in the spotlight. FXE deserves some credit for what turned out to be a solid Monday performance.
However, that does not mean the near-term outlook for the common currency is perfectly sanguine.
While the ECB’s efforts to weaken the euro this year have not delivered on par with investors’ expectations, some market observers still believe the currency is heading for more downside. That does not mean the euro does not face more near-term downside, a scenario that could worsen for the common currency if the dollar rises in anticipation of higher interest rates in the U.S.
Near-term traders should note the euro’s technical condition is rapidly deteriorating.
Related: International ETFs: Currency Story Hasn’t Changed
Referendum results in Italy, the Eurozone’s third-largest economy, prompted the resignation of Prime Minister Matteo Renzi and are seen as the latest global rebuke of left-leaning leadership. Italy and other major Eurozone could contribute more political volatility to the euro.
“If new elections need to be called in 2017, traders will be watching the anti-establishment 5 Star Movement party which has strongly supported Italy leaving the Eurozone. With upcoming 2017 elections in France, The Netherlands, and Germany, the Eurozone is likely to be quite volatile for the upcoming year,” said OptionsExpress.
In the near-term, the euro could also be imperiled by the Federal Reserve moving forward with its first interest rate hike of 2016 later this month. If the Fed hikes rates, the exchange value of the U.S. dollar will strengthen, or foreign currencies will depreciate relative to the greenback. Consequently, a non-hedged international investment will experience lower U.S. dollar-denominated returns.
SEE MORE: Europe ETFs Surprise After Weekend Elections
Renzi’s resignation could lead to early elections and a rise in support for the populist anti-euro Five Star Movement. The party would seek to carry out a referendum on Italy breaking away from the Euro area.
Regarding the euro’s technicals, “The 20-day simple moving average (SMA) is providing resistance which is being tested with today’s trading. However, the bearish trend is still seen as the 20 day SMA is way below the 50-day SMA, and the slope of the 20-day SMA is quite steep to the downside. 14-day RSI is a neutral 46.50,” notes OptionsExpress.
For more information on hedged options, visit our currency hedged ETFs category.