EURUSD bullish and bearish technical, fundamental drivers for both short and longer term, plus new signs of the big long term bearish threat to the pair – The Europeans themselves, plus a real-time trader positioning sample & links to details on key market drivers for spot forex and FXE, UUP and related ETF and related EURUSD derivatives traders & investors
The following is a partial summary of the conclusions from the fxempire.com weekly analysts’ meeting regarding the outlook for the EURUSD, market drivers, likely trading price action, etc. S
Highlights
- Weekly Technical Picture & Commentary
- Suggested Short Term EURUSD Trade Entry/Exits Points
- The Key Technical Driver For the EURUSD
- Fundamental EURUSD Drivers This Week
- Bullish
- Bearish
- Real Time Trader Positioning Sample
- Top Calendar Events
- Conclusions For The Coming Week EURUSD Outlook
- Fundamental Drivers Longer Term
WEEKLY TECHNICAL PICTURE: Bullish On Weekly, Daily Charts
As shown in the weekly chart below, the pair has decisively regained its uptrend line, broke out above its descending channel, and is poised to re-enter its upper double Bollinger band zone that suggests reliable upward momentum and thus more upside ahead. The moving averages continue trending higher, so the overall picture is still one of continued upward momentum in the medium term.
EURUSD WEEKLY CHART JAN 2012 – PRESENT
KEY:10 WEEK EMA DARK BLUE, 20 WEEK EMA YELLOW, 50 WEEK EMA RED, 100 WEEK EMA LIGHT BLUE, 200 WEEK EMA VIOLET, DOUBLE BOLLINGER BANDS: NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
04 FEB 15 2133
EURUSD DAILY CHART OCT 2013 – PRESENT
KEY:10 WEEK EMA DARK BLUE, 20 WEEK EMA YELLOW, 50 WEEK EMA RED, 100 WEEK EMA LIGHT BLUE, 200 WEEK EMA VIOLET, DOUBLE BOLLINGER BANDS: NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
03 feb 152131
The daily chart for the EURUSD shown below is also bullish:
- It has the pair already in that upper quarter of the double Bollinger bands, suggesting that upward momentum is now strong enough for those seeking to go long on short term trades with holding periods under a week
- The pair has decisively broken out of its descending channel
Near Term Entry/Exit Points
The next resistance points for those working off of daily charts are: 1.3720, then 1.3770. Pullbacks into the 1.3625-50 area would be new buying opportunities for short term traders.
A decisive break below the 1.3560 area, which would take out triple support of price levels, the 100 day EMA AND the 23.6% Fibonacci retracement level, would justify not only exiting short term long positions, but also opening new shorts.
The one big bearish thing we see above is simply that the pair closed just under 1.37.
The pair has failed to clear the 1.37 level repeatedly this year, which also corresponds to the 61.8% Fibonacci retracement of the prior pullback of late December 2013 – January 2014.
What’s needed to get it over that hump?
First, we need continued risk appetite, as indicated by comparing how the pair has moved with the major European and US stock indexes.
What’s Driving The Trend? Indexes Suggest Overall Risk Appetite Remains A Key EURUSD Driver
The two week bounce on the EURUSD weekly chart above tracks similar behavior in US and European stock indexes, suggesting that overall risk appetite, which stock indexes represent, is a key driver (as usual). See here for a detailed explanation of how and why currency traders (really any trader or investor) need to monitor stock indexes in order to improve their performance.
Note how our sample of US and European indexes shown below have also finished a second straight week higher, just like the EURUSD.
WEEKLY CHARTS OF LARGE CAP GLOBAL INDEXES WITH 10 WEEK/200 DAY EMA IN RED: LEFT COLUMN TOP TO BOTTOM: S&P 500, DJ 30, FTSE 100, RIGHT: CAC 40, DJ EUR 50, DAX 30
KEY FOR S&P 500:10 WEEK EMA DARK BLUE, 20 WEEK EMA YELLOW, 50 WEEK EMA RED, 100 WEEK EMA LIGHT BLUE, 200 WEEK EMA VIOLET, DOUBLE BOLLINGER BANDS: NORMAL 2 STANDARD DEVIATIONS GREEN, 1 STANDARD DEVIATION ORANGE
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
02 feb 15 2056
FUNDAMENTAL OUTLOOK NEAR TERM: Overall Bullish
For the other ingredients to a sustained EURUSD rally in the coming week, will look at the fundamental picture.
The Bullish
The simultaneous sell-off in the dollar, rally in stocks and stable Treasury yields implies that investors believe that the softer economic reports raise the odds for a more gradual course of tapering by the Federal Reserve. Although Yellin’s testimony this past week suggest she intends to maintain the current pace of the taper, if hard winter weather is in fact the cause of recent weak jobs and retail sales reports, then the February snowstorms in the US should bring at least another month of soft economic data that could raise the odds of a taper pause. That would weaken the USD and thus be bullish for the pair.
That said, the taper has not been a big plus for the USD, as the Fed has succeeded in restraining speculation about interest rate increases for the US rates (EM rates of course have soared , but the taper is at best only partly to blame and anyway, they’re not the Fed’s concern until they show signs of threatening US growth).
Indeed, US treasury yields are down over the past two weeks, a further negative for the USD and thus bullish for the EURUSD.
However the US calendar is light this week. The biggest calendar likely driver of the pair, assuming risk appetite noted above continues to hold (ok, and no surprise ECB easing measures), is the overall result of Thursday’s German, French, and EZ flash manufacturing and services PMIs. It’s hard to see the pair making a decisive move over 1.37 unless these reports reinforce the slow but steady recovery picture.
See below for other top calendar events.
Meanwhile Retail Trader Sentiment Remains Short the EURUSD
That means if the EURUSD can break decisively above 1.37 it’s likely to test higher on a short squeeze.
Our real-time sample of nearly 500 retail traders (average holding period 8 weeks) shows that they’re 66% short the EURUSD. We aren’t the only ones seeing this overweighting, although our real time sample (up to date as of Feb 14) is more up-to-date than most others.
Source:forexfactory.com
05 feb 16 0008
This overweight positioning has increased over the past week. In our EURUSD forecast last week, we recorded a somewhat smaller proportion of EURUSD short positions. Apparently traders are adding to losing positions or new traders are attempting to time a reversal before it actually begins showing signs of occurring – a strategy that usually ends badly, as I discuss repeatedly in the RAMM (risk and money management) sections of my book.
The Bearish
The release of the FOMC minutes this week is likely to be USD supportive, showing broad support to continue the taper, though the taper has failed to provide much lift for the USD, so the effect will likely be mild at best.
While the above noted risk asset rally had helped the EUR versus its low yielding counterparts like the USD (also the JPY), that same risk rally has limited the EUR’s gains to these low yielders, with minor losses against most other majors and a big 1.62% drop vs the GBP, which spiked this past week combination of better than expected data and a bit more hawkish sounding Bank of England, which upgraded its UK GDP forecasts.
Other Top Calendar Events
As noted above, the pair is moving with overall risk appetite as much as anything else, and that means the week’s top calendar events could be decisive, including those beyond the US and Europe.
Tuesday: German ZEW sentiment survey, ECOFIN meetings (see below for more on this)
Wednesday: US building permits, PPI, FOMC Meeting Minutes
Thursday:
–China HSBC flash manufacturing PMI
–EU: German, French, EU Flash manufacturing and services PMI
–US: Core CPI, weekly new unemployment claims, Philly Fed manufacturing index
Friday
All: G20 Meetings
EU: EU economic forecasts
US: Existing home sales
Conclusions For The Coming Week EURUSD Outlook
As we noted last week, the EURUSD is unlikely to see a material pullback until there is a s sustained bout of risk aversion, a surprise sign of US tightening (whether it be an intentional Fed policy move like a taper acceleration, or a simple spike in US bond yields imposed by credit markets).
Otherwise, the above noted resistance and support levels are what we’re watching.
FUNDAMENTAL OUTLOOK LONGER TERM: BEARISH
The past weeks have been a study in contrasts for the EURUSD.
Bullish: somewhat improving earnings results, economic data, and fund flows into European equities (versus outflows from US and Asian stocks), and continued complacency about EU crisis reemerging.
Bearish: Ongoing new signs that waning popular support for the EU, or more specifically, the sacrifices required to ensure its survival, will ultimately prevent it from achieving degree of integration it needs to survive as a kind of United States of Europe. These include:
- Switzerland’s vote against free immigration into Switzerland
- The UK’s warning to Scotland that it won’t be allowed to keep the pound if it votes for independence
- The German Constitutional Court’s ruling on the legality of the OMT: As we discussed last week here, the Court didn’t simply refer the decision to the EU’s highest court. It also said that as far as Germany is concerned, the OMT program (that allows the ECB to become buyer of last resort for sovereign bonds) it illegal and therefore German participation (aka funding) is unlikely at this time.
- The failure to of the single resolution mechanism to be the effective safety net for failed banks that it needed to be in order to restore confidence in EU banks, prevent another banking crisis, and allow the coming ECB bank stress tests to be rigorous enough to uncover all of the weak banks without risking a crisis from finding too many undercapitalized banks and no safety net for them. We’ve written a lot from November – January on this lurking disaster, for example, see here. In short, it is as US Treasury Secretary Jack Lew said, too small and too slow to be effective.
For full details on how this lack of popular support is undermining everything the EU is doing to save itself, see our article on lessons for the coming week, due out Sunday or early Monday. You’ll find it here.
Note that this week we’ve a Eurogroup and ECOFIN meeting at which they’ll be discussing the SRM. In the near term this is unlikely to be a market moving event, given that the colossal failure of the SRM deal in December passed with little fanfare despite the profound dangers it presents by leaving the EU vulnerable to a new crisis of confidence in its banks that can go systemic if not checked by a functional SRM – but as of now that doesn’t exist.
That said, we may learn some details that might explain how the EU plans to let the ECB conduct rigorous stress tests without a proper bank safety net in place to prevent revelations of bad banks sparking a crisis.
See here for Part 2.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.
