Between November 2007 and February 2008, EUR/USD consolidated within a range between roughly 1.4330 and 1.5000, before breaking through resistance on 27 February and reaching for new highs. Within five weeks, it bounced off resistance at 1.6000 and entered another consolidation range, between that level and 1.5285, where it has remained ever since.

This is best seen on weekly charts, as shown below. The first consolidation is bracketed with green horizontal lines, the second one in red:

This is, perhaps, the sketching of a double top formation. All of the key elements are present: the uptrend, the initial peak, the trough between creating a support level, the second peak, and the beginning of the second decline. Of course, the pattern is not confirmed until the support level at the lowest point of the trough is broken; however, a close beneath 1.5285, particularly with rising volume, could signal a reversal of EUR/USD’s long-term uptrend.

It is also becoming apparent from an examination of the fundamentals that the economic scenario is shifting. The recent release and revision of U.S. GDP dating back to 2005, with negative growth limited to 4Q2007, indicate an economy that is sluggish and even arguably stagnant, but not in contraction. The U.S. continues to show resilience with employment data, ISM manufacturing and non-manufacturing indices, personal consumption and disposable income, and new factory orders all surprising to the upside, although that may mean no more than the news wasn’t as awful as expected.

In the Eurozone, on the other hand, all of the recent surprises have been to the downside. German factory orders fell −2.9% in June and were revised downward to −1.4% in May, with the annual rate falling to −6.1%, while machinery orders were down −5%. Consumer confidence in numerous Eurozone nations is following the U.S. lead into the pits, French, Italian, and Eurozone purchasing managers’ indices have all fallen below the break-even 50 level, and Eurozone retail sales fell by 0.6% in June. Although it would be simplistic to blame any of this on the ECB’s July rate hike, in the face of such economic data the wisdom of that move begins to seem rather questionable and puts the decoupling theory to bed for the Eurozone.

Early estimates of Eurozone 2Q2008 GDP, scheduled for release on 14 August, threaten to print in the red. Inflation remains high, 4.1% y/y in July; however, falling consumer demand and commodities prices (should that fall continue) would ease that pressure, although second-round inflation risks remain. In such a scenario, another ECB rate hike this year become less likely and even if it occurs, EUR/USD already seems rather pricey. After all, poor economic data have been thoroughly priced into the USD side of that equation but not into the EUR side, and one can’t help but anticipate more such data to follow.

In this shifting fundamental landscape, underpinned by the technical chart, M. Trichet’s press release will be analyzed minutes following the ECB decision Thursday. Any deviation from the strictly neutral, that current rates are appropriate to contain inflation, or too much of an emphasis on the obviously increasing downside risks to growth, could easily prove to be dollar positive and continue the pair’s slide.