If you did not grow up in North America as I did, you may not be accustomed to the charming tradition of Groundhog Day. The groundhog is a small rodent belonging to the marmot family. On the second of February every year, children all over the continent listen to the traditional story of the groundhog. You see, it is a very timid animal. According to folklore, when the groundhog comes out of hibernation and into the open air, if the weather is sunny it sees its shadow, becomes frightened and goes back into hibernation. I that case winter lasts for another six weeks. If, on the other hand the weather is cloudy, it stays outdoors and spring will come early.
The market has its groundhog days. GBPUSD is having one now. EURUSD’s groundhog day is just around the corner. You see when the market breaks out above old tops, it behaves like a groundhog. It is not sure whether to enjoy its new found freedom or return and hibernate for a while. On 14 May EURUSD popped up above swing tops, but decided the sun was too bright and went back into hibernation. It is eyeing the opening of its hole right now.
Truth be known, it would already be out, were it not for Greece. And, in my humble opinion, GBP owes a lot to Greece for its new found vigour. Why is this so? If you have been following my articles on EURUSD, you know by now that according to very sound Gann analysis, the secular bull market in USD is over. It was over in March, but it has taken a while for this reality to sink in. Last time the market turned it took four months. We are nearing the four month mark right now.
But I digress. Because money is flowing out of the dollar it has to go somewhere and the first stop on that path is the euro. But because of the Greek situation, there is a certain hesitancy to go there. The next stop is GBP and that is where hot money is flowing right now.
But make no mistake. Markets hate uncertainty. They prefer any bad news at all rather than anticipation of bad news. The Greek situation is like an abscess. You can puncture it (default) or you can extract the tooth (Grexit) but there is no third option. And it matters not which of these two becomes reality, as with a real abscess, there will be short-term pain and longer term relief. When the solution comes, the market will breath a deep sigh of relief, and the hot money will flow into the euro big time. When it happens, remember you read it here first.
But what about Groundhog Day? Nobody knows if it will be sunny or cloudy, but the groundhog that is EURUSD is looking a bit timid. Further, all of the talking heads are turning bullish on the euro which makes me nervous. I am expecting a reversal next Wednesday. If EURUSD comes out of its hole just before that date, expect it to retreat. On the other hand, if EURUSD does not break out above 1.1465 between now and then and we see a swing bottom on Wednesday, expect Mr Groundhog to strut forth boldly and announce that Euro Spring has arrived.
EURUSD Daily Chart