After a long time in which the Euro strengthened considerably against the USD, it seems as if the tide has changed. Currently priced at 1.4795, the EUR/USD pair is a long way off from its all time high.
But why is this happening? Why is the USD becoming stronger while the US economy is still faltering?
I believe it’s a case of market psychology at its finest. The truth is that people are more afraid of the prospect of bad news than bad news themselves. For instance, and this has nothing to do with Forex directly, people are terrified of being sick but if they’re ever diagnosed with anything, most will put up a very good fight.
The market is the same: yes, the US economy is bad, yes we’re going to see more writeoffs soon, but for most people it’s as though the cat’s already out of the bag. It’s already known, there’s nothing to be scared off, now we just need to cope with things. Of course, this is far from the truth logically, but the human psyche is an illogical thing and always has been.
Europe, on the other hand, is bad news waiting to happen. Britain is already showing signs of a terrible housing crisis, and although it’s not part of the Euro bloc, what’s happening there is like a group of ominous storm clouds above the rest of the European Union.
Everyone knows that Europe is going to suffer due to the economic crisis. What happens in the United States effects the rest of the global economy and Europe will not escape. But the problem is that it’s still news waiting to happen, not something which “seems” to have already transpired. Sure, some signs are evident, but there’s a sense of things to come. Until they do, people imagine the worse. This is a psychological weight which is pulling the Euro down and causing the USD vs. EUR battle to be tilted in the USD’s direction.
Will it last? Impossible to tell in the long run? Have I just thrown a bunch of psycho-mumbo-jumbo at you? It may very well be. But a trader has to realize that people act on their emotions. Knowing how to take advantage of this can be worth a lot of money. Depending, of course, on your ability to discount these emotional pulls yourself.
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