The EUR to USD exchange rate has been successful in resisting the dollar's recovery over the past 24 hours - is this the end of the descent?
- Commerzbank abandon short trade on EUR/USD
- Citi enter short trade on EUR/USD
- Swissquote Bank can't make their minds up
At the time of writing the EUR to USD exchange rate is trading at 1.1391, marginally higher than the 1.1360 support formed over the previous 24 hours.
While there are no headwinds from US interest rate expectations that would support further EUR/USD declines, there is a lack of robust economic data from the Eurozone to generate any notable recovery.
The shared currency's resillience is however starting to worry those strategists who have been betting for an extension of the recent decline in the euro.
Commerzbank technical analyst Karen Jones has decided to close her short trades in EUR/USD, as the pair reaches tough support at the 1.1339 level and waning bearish momentum on the 4-hr charts increase expectations of a rebound.
“We look for further weakness this week to initially the 2 month support-line at 1.1339 and we may see this hold the initial test. We note the divergence of the 240-minute chart and will cover shorts for now and resell on the rally.”
Part of the problem is the monthly pivot at 1.1374 which is an obstacle to more downside.
Monthly Pivots are calculated using the previous months Open High Low and Close data, and are something of a relic from the age of pit-trading when they were used as a methods of 'framing' the parameters of the day (in the case of monthly pivots, the month's activity). Many traders place counter-trend orders on pivots in the hope of trading the bounce.
Citi: Time to Sell the Euro Against the Dollar
While some short-term traders are looking to exit negative bets on EUR/USD, others with a longer trading time frame are actually looking to initiate fresh sells.
Citigroup's FX strategy unit have said they are convinced by the idea that the dollar is to strength over coming weeks and months as markets bring forward their expectations for the next US interest rate rise.
Despite a number of Federal Reserve governors talking up the chance of a rate rise as early as June markets continue to price the dollar and interest rates for a rate rise in 2017.
There is therefore potential for a EUR/USD decline as the dollar is forced higher as the gap between markets and the reality of Fed thinking is narrowed.
The CitiFX Technical team has gone short EURUSD at 1.1383 with a minimum target of 1.0820 and a likely extension back towards the trend lows at 1.0458-1.0523 given a range of upcoming event risks for the euro zone in the next 2 months.
Other analysts are simply neutral on the pair, such as Yann Quenlann of online lender Swissquote, who sees the pair as broadly balanced and consolidating:
“EUR/USD is now trading sideways…”
The next support level is in the 1.11s, given the first support layer at 1.1370 has already been surpassed.
However, overall Quenlann expects an, “increase within the uptrend channel.”
“Stronger support can be found at 1.1144 (24/03/2016 low). Expected to show further increase within the uptrend channel.”
Singapore Bank OUB’s Querk Ser Leang has also adopted a neutral stance:
“Indicators are mostly neutral and the current movement is viewed as part of a consolidation phase. In other words, expect sideway trading for today, likely between 1.1360 and 1.1450.”
The analyst notes the lack of market moving data from the Eurozone in the week ahead, highlighting the first Eurozone GDP revision for Q1. The preliminary result surprised to the upside with a very positive 0.6% result, which was double the 0.3% in Q4, so the real question now, is can these gains be held?
Futures' Data Illuminating
The Commitment of Traders report (COT) which shows how big money speculators are positioned in the Currency Futures market, is, interestingly, showing a fall in the number of bearish bets (known as shorts) on the Euro. This seems to suggest a more bullish outlook for the pair, rather than bearish.
Scotiabank’s FX Strategist Shaun Osborne notes that from being the currency with the most bets against it, the euro has been surpassed by the pound in that dubious distinction, perhaps also signalling an improvement in sentiment.
The euro also tends to rise when a crisis happens, or when the mood turns sour towards emerging markets (EM) and the developing world. This is because many investors borrow euros from euro-zone banks and use them to invest in risky emerging market assets.
This is because the euro is so cheap to borrow now the ECB have reduced interest rates to 0.0%. When there is a crisis, however, investors panic-sell those same EM assets and repay the borrowed euro’s, thus causing a sudden glut of demand for the currency and pushing it higher.
There are signs in the COT data that risk sentiment could remain subdued in the week ahead.
Gold, for example, saw a sudden spike of about 30% in its long positions in the last week according to the COT data, and it is a favourite risk haven for investors when sentiment turns negative.
The spike indicates that large speculators, the ‘smart money’, the ‘big players’ are accumulating gold in preparation for another rally higher.
This could mean they expect either that there is a chance of a global crisis on the horizon, or that the Fed will not raise interest rates in June.
Either outcome would be positive for the euro and see a rise in EURUSD.
A bearish pivot in the number of long positions on the Aussie Dollar is a further sign risk appetite could be about to fall as the Aussie tends to fall during times of crisis.
We are therefore cautiously bullish the pair, with the possibility that a rise in risk aversion may cause investors to panic and lead to gains in the euro.
A break above the key 1.1479 highs would confirm a continuation up to the next major resistance level at 1.1534 where the R1 monthly pivot is situated.