For all of the passionate discourse amongst the gold and silver investment community, it is without doubt the fiat paper factory that is garnering most of the attention as of late. While no one can deny the extreme loyalty the precious metal bugs have towards their underlying asset of choice, physical bullion has been going absolutely nowhere in the markets. Yes, it can be argued that the spot-price is manipulated by the derivatives play, which potentially is causing distortion in the asset finding true valuation, but ultimately, traders transact based on the market price, and this price has been bearish, yet stubbornly resilient in falling over critical support lines: as I said before, its going nowhere.

Fiat currencies, however, are on a tear: the Yen/Dollar ratio is screaming towards new heights (suggesting a weakening Yen), while the Euro, which was offered as a sacrificial lamb to the global conglomerate put-squad only a few months ago, is now above last year’s peak. The big question is whether the above trends will continue their course or if a reversal is in play. The European sector is rather unique in that there are regional financial powerhouses that have not yet consolidated into the union, namely, Great Britain and Switzerland, so Europe will be where our discussions will focus on.

First, let’s take a look at the 1-year daily chart for the Euro:

Using the intermediate peak price from May 2012 as an anchor, a technician can chart a rising resistance line that has been capping positive runs in the Euro until last Friday, when the currency “gapped up” and closed at 136.49. While it is certainly significant that a resistance point was broken, the fact that the defining move came on a doji star, where the opening and closing price of a session are identical or very close to each other, should give a currency trader pause. Also, note that the Relative Strength Indicator is registering over 75: while no one should use this one sole metric to decide a position, the RSI has been a fairly solid gauge to determine the next course of action for the Euro. Over the past three years, whenever the RSI confirmed either overbought or oversold conditions, the currency reversed trend within two or three months. As the most recent trend is up, this technical indicator is forecasting a shift downwards. A similar situation occurred in mid-September of last year when the Euro was closing in on the 132 level before hitting the aforementioned resistance line, as well as ringing the overbought-bell of the RSI.

That’s one side of the story. As mentioned previously, a technical analyst should never rely on any one tool or methodology so we’ll now turn to a long-term chart of the Euro against another major currency, the British Pound:

For the most part, the Euro and the Pound directly correlate with each other with rare exceptions. Coincidentally, the recent surge in the Euro for the month of January is one such exception as the Pound actually declined. Are we now going to see an inverse correlation going forward? It is a brave soul that calls an entirely new trend in the face of massive historical data: in the times that the Pound and the Euro were moving inversely, the price action for both currencies eventually merged back into direct correlation. Unless something fundamentally has changed in Europe, the conservative money will anticipate a re-alignment of the Euro and Pound, which brings us to our next topic: 

Eschewing the obvious pun, the Pound has taken a bearish turn: yes, it did challenge the 163 level twice in December but failed to clear that magic number, forming a sort-of quadruple top over the last nine months. Consequently, since the beginning of the new year, the Pound has been on a dramatic decline, falling through the top two Fibonacci retracement levels, with the current price action settling precariously above the 38.2% mark after a failed rally. While it is true that the Pound is near oversold status, there’s not much horizontal support at 156 so another failed rally could result in the index falling to 155 or 154.

So is every European currency taking a turn for the worst? Not quite, if you consider the Swiss Franc:

The Franc’s long-term chart suggests a steady rise of growth over the last six months, this coming off of a year-long consolidation of 2011’s peak high. The current RSI level, at 66.24, is technically not considered overbought, but it is moving towards that status. One might even assume that the Franc is charting a bullish rounding bottom formation, which would ultimately set a long-term target of over 140.

However, some analysts at CNBC believe that certain technical and fundamental factors may contribute to a near-term decline in the Swiss currency and therefore have recommended buying put options. This is where things get a little interesting:

Despite variances in degree, the Euro and the Swiss Franc generally correlate with each other: in this case, a trader would be even more cautious of going long the Euro due to CNBC’s bearish warnings concerning the Franc. Since we also that the Euro itself reached overbought territory, the risk:reward ratio is in favor of the bears.