EUR/USD Started a Sharp Run – What is Next?

The EUR/USD pair is recording the third positive month in a row and is slightly below the 23.6% Fibonacci retracement level which overlaps with the strong psychological level at 1.1200. Will the price hit the latter level and jumps higher at 1.1300? or it will have a rebound on it? What do you think?

The EUR/USD pair moved above 23.6% Fibo retracement level and the Pivot Point (Resistance 1) but is trading below the 1.1270 resistance level. I suppose a break above the mentioned level will push the price further up.


The EUR/USD pair struggled slightly above the 1.1170 and 1.1200 barriers. The price awaits the Fed policy meeting later today for a volatile move as over the last four days has a weak move. My expectation is a run above the 1.1285 resistance level as I mentioned in a previous post.

EUR/USD started a consolidation area between 1.1115 and 1.1285. I suggest to be away for the market until it breaks the area.

Sell-side bank research that commented on yesterday’s European Central Bank (ECB) meeting were unanimous in their interpretation that President Mario Draghi was dovish.

European fixed income also agrees with sell-side research as prices are largely higher (i.e. lower yields) for the second day in a row.

We would note that President Draghi explicitly stated that they would provide more clarity in the “autumn.”

Well, the next ECB meeting is September 7th and summer ends on September 22nd. So, if the next major communication comes in the autumn, he was referring to their October meeting.

Elections in Germany are in September. Why not wait until after?

This is important to recognize because many professionals long on the euro are looking for a ECB bond purchase taper announcement at the September meeting to begin in December. So they are off by a month or so.

So, if banks, bunds, and Draghi are somewhat united, why is the euro strong, or not giving back any of its gains immediately following the ECB meeting yesterday?

The most cited reasons are:

  1. On the EUR-leg, per his commentary at the press conference, President Draghi was fine with the current level of the trade-weighted euro exchange rate.
  2. On the USD-leg, the news that Special Counsel Robert Mueller is zeroing in on President Trump’s business transactions, a perceived red-line by the President, as stated the night before in his New York Times interview, is lowering the chances of fiscal stimulus. Add in risk that the US Department of Justice could also be thrown into chaos with its leadership, both the Attorney General and Deputy Attorney General, resigning or being fired, and sentiment is weighing on the US dollar.
  3. Do not mistake looking at the EUR-to-German Bobl interest rate differential with the global carry trade. With the US dollar weakness, the reaction in the European bond markets is a sign of excessive liquidity looking for yield, not a divergence with the EUR.
  4. Momentum in the trade-weighted US dollar weakness (JPMQUSD Index) has accelerated. As you can see, weakness accelerated beyond the downtrend channel yesterday.
  5. Technically, the EUR/USD will decisively breakout on the weekly closing price chart of a narrow 30-month range. This is so powerful that even the biggest bomb throwers regarding the disintegration of the eurozone have no choice but to respect the crossroad in which the euro exchange rate will close out this week.

For now, we are not looking to choose sides and will let you decide which direction the next one or two big figures in the EUR/USD goes.

If you are long he euro, here is what I would be concerned about.

Foreign exchange professionals are now tracking equity flows closely. Usually, it is the other way around – that is, equity investors becoming a transient expert in another asset class.

This is important to recognize because foreign equity investors are now a HEADWIND to a higher euro exchange rate if they begin selling their exposure. As a reminder, there have been inflows into European equity strategies (which are long Euros) for 27 consecutive weeks.

Over the past few years, many foreign investor purchases of European equities have been made on a currency-hedged basis, to remove any risk of a change in the FX rate.

For example, a foreign investor would buy a European stock in local currency and then sell an equal amount of the same.

From an FX perspective, when a US-based investor went into European equities, they effectively bought EUR/USD when they purchased the stock (i.e. they “sold” US dollar cash to buy Euros in a stock), and then hedged their purchase by selling an equal amount of EUR/USD in the spot market.

At this juncture, EUR longs should be more nervous that the DAX and Eurostoxx drop ~3% down to their respective 200-DMA’s, and breaks through it, which would say that the market does not think the underlying economic strength warrants an overshoot in the currency to hurt exporter-based company’s earnings.

I think we may have seen the top on EURUSD. I will be looking to see if this forms a head and shoulders pattern on the 4 hour chart.