Euro Ready for a Turn

Three consecutive days of lower highs and narrower trading ranges paint the picture of a currency pair that is having an exceptionally difficult time holding near its record highs. In our weekly Commitment of Traders report, we talked about how Euro net longs hit an all time high for a third week in a row and whenever sentiment is this one-sided, the risk of a reversal is extremely high.

Technically, the appearance of RSI divergence on the daily charts and MACD turning negative in the same time frame also supports more Euro weakness. All we need to see now is softer Eurozone manufacturing PMI numbers and German unemployment figures. On Monday, we already had a sharp turn in German retail sales. At that time we reminded our readers that the EUR/USD peaked in December 2004 on back to back weakness in European data. Should the figures tomorrow disappoint as well, then a turn would be supported by fundamentals, technicals and sentiment. However it is important to point out that the current forecast is for stronger and not softer numbers. With German business confidence accelerating in the month of April, manufacturing conditions should have been decent. It remains to be seen whether or not this translates into an improvement in the labor market. Meanwhile EUR/CHF hit an 8 year high today. For a currency pair that typically range trades, the 500 point near vertical rally over the past 2 months has been one of the clearest trends in the foreign exchange market. Despite comments by the Swiss Finance Minister, demand for carry trades continues to drive the currency pair higher. Swiss manufacturing PMI is due for release tomorrow. Weakness in the currency should spur demand for Swiss exports, which would translate into stronger manufacturing sector activity.