Looking back at 2011, almost everyone agrees that the euro weakness/dollar strength we saw was only logical. Seriously, where else was the euro to go but down last year, with all the problems in Europe? It's a wonder EURUSD didn't fall any lower!
"Fundamentally"-based explanations like this always make perfect sense when you look back. It's when you try to apply them going forward, that's when it gets tricky. I'll give you an example.
On January 2-3, EURUSD shot up from near $1.29 to near $1.31 -- only to fall right back down to $1.29 on January 4. So here's the question: Where is EURUSD going from here?
It's hard to answer this with any real certainty using "fundamentals." Your answer depends on dozens of factors: U.S. and European inflation; how well European banks are capitalized, now and in the future; interests rates on both sides of the ocean; unemployment, GDP, bailouts, political risks… It's a giant chess game.
Want to simplify your answer? You can: Try technical market analysis instead.
In all fairness, there are many technical methods, and if you wanted to, you could make yourself almost as miserable looking at them all. The good news is that you don't have to.
There is one technical analysis method in particular that incorporates, even subsumes, other technical indicators: Elliott wave analysis. Again, I'll give you an example.
As EURUSD was making its one-week high on January 3, our own forex-focused Currency Specialty Service, whose main forecasting tool is Elliott wave, posted this intraday update for subscribers (excerpt):
EURUSD (Intraday)
Posted On: Jan 3 2012 1:41PM ET / Jan 3 2012 6:41PM GMT
Last Price: 1.3065
Sideways, then lower. The euro continues to test of the lower end of the target area. A decline below 1.2965 would confirm the rise from 1.2858 as a correction.
[Earlier Intraday Update] Jan 3 2012 11:24 AM ET: The euro has bumped into the lower end of the 1.3069-1.3112 target area. With three-wave visible from 1.2858, we still see it as a correction, leaving the euro vulnerable.
[Earlier Intraday Update] Jan 3 2012 9:35AM ET: The three-wave decline from 1.3199 to a new low represents wave (b) of a flat or triangle. Under this scenario resistance in the 1.3069-1.3112 area should prove stiff.
On January 4, EURUSD fell after reaching those price targets, as expected.
This is not to say that Elliott wave forecasts always work; of course not. But won't it make your job as a forex trader much easier to use a strict set of objective forecasting metrics -- versus guessing at a virtually unlimited number of economic factors?..