Have we overshot?

Whether you focus on fundamental or technical analysis when trading currency, you should have a healthy grasp of both.  Fundamentally the current account of the US is unsustainable and depreciation was expected.  After experiencing such a large depreciation over six years all traders should ask themselves, have we overshot?  When I say overshot I reference the Dornbusch model, which can be even more volatile if you believe in the J-curve.  Volatility is synonymous with the foreign exchange market, which is part of the allure.  The volatility enables range traders and technical traders an opportunity to profit.  As a trader you need to know that at times trends are overcompensated, and fundamentals are temporarily ignored. 

            In the short term it seems inevitable that the EURUSD will break 1.60, even though traders know this is an unsustainable level.  The EZ can not sustain such a high exchange rate without seriously damaging international competitiveness.  Why will the currency pair reach 1.60 if traders know it is unsustainable?  Answer because in the currency market we overcompensate, in terms of exchange rates.  Exchange rates adjust instantaneously while goods markets adjust slowly.  Prior to investing in the EURUSD you should think whether or not this exchange rate reflects fundamentals or sentiment.  In the case of the EURUSD the moment it hits 1.60 look for individuals taking profit and the pair moving back toward 1.50.  The ball is in Bernenke’s court because he has the power to dictate the sentiment regarding the pair.  The ECB will raise, who knows what the Fed will do?