Fundamental and Political Drivers in the Spotlight

EUR/USD Price Analysis

  • EUR/USD testing multi-year symmetrical triangle
  • Brexit talks resume
  • Dollar weakness eyeing 2018 lows
  • Market sentiment points to further short-term upside

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EUR/USD BULL STRENGTH

Bears have been unable to reel in the dominant Euro since March, which has seen a potential breakout of the multi-year symmetrical triangle formation. Fundamental factors have been substantial drivers of US Dollar weakness with decisive Euro policies and a more plateaued COVID-19 curve in the Eurozone affording a tailwind to EUR/USD bulls.

EUR/USDTECHNICAL ANALYSIS

EUR/USD Monthly Chart:

Chart prepared by Warren Venketas, IG

The monthly chart above exhibits a multi-year symmetrical triangle which has recently broken above topside resistance. This does not mean that this is confirmation of a breakout as the monthly candle is yet to complete. Price action may revert within the chart pattern over the medium-term.

As price approaches the apex of the symmetrical triangle, trader’s often look for large price moves either up or down which coincides with forecasted extreme volatility as the plethora of macroeconomic and political events converge.

EUR/USD Daily Chart:

EUR/USD Latest: Fundamental and Political Drivers in the Spotlight

Chart prepared by Warren Venketas, IG

Price action demonstrates strong upward momentum which is supported by the Relative Strength Index (RSI) as the oscillator approaches overbought territory for the fourth time since March (red).

Current resistance can be seen around the 1.1916 level over recent weeks as bears defend profusely. If price can push above this level, traders may look for further resistance at the 1.2121 50% Fibonacci level (blue). Failure to do so will could see confrontation of the recent swing low (1.1695) and potentially the 1.1500 psychological level.

BREXIT NEGOTIATIONS RESUME

With Brexit discussions largely hidden in the midst of COVID-19, talks have resumed today but so far neither side is willing to budge. It seems as if both sides are waiting for the other to make the first move. With seven weeks left to reach a Brexit deal markets and Brexit stakeholders are hoping for some form of near term certainty which can allow business to be achieved with some certainty.

DOLLAR INDEX CONTINUES ITS DOWNWARD TRAJECTORY

The US Dollar has fallen roughly 11% since March 2020 highs with the US Dollar Index (DXY) finding support at the 92.50 zone. 2018 lows 87.91 (blue) may be on the cards if the 91.72 76.4% Fibonacci zone is broken – Fibonacci taken from February 2018 lows to March 2020 highs.

US Dollar Index (DXY) Weekly Chart:

EUR/USD Latest: Fundamental and Political Drivers in the Spotlight

Chart prepared by Warren Venketas, IG

US Dollar weakness persists through a variety of compounding factors but primarily US stimulus measures which has somewhat diluted USD strength. Further stimulus chances have been halted with Republicans and Democrats at loggerheads, which could take some time before a compromise is reached to aid the US economy. Additional stimulus would likely supplement the weakening US Dollar while indecision between the camps may allow some near term relief for USD bulls. Trading against this preceding downward trend may be akin to “catching a falling knife” so trader’s should exercise caution with this viewpoint.

With US elections around the corner the market can expect an increase in volatility before, during and shortly after the election regardless of the outcome however, be weary of historical trends as every election is different. Options trader’s may look to employ straddle and/or strangle strategies which can exploit increases in volatility and significant swings in EUR/USD price action in either direction.

WEEKLY EVENTS SCHEDULED ON THE EUR/USD ECONOMIC CALENDAR

DailyFX Economic Calendar

EUR/USD Latest: Fundamental and Political Drivers in the Spotlight

The upcoming week is scattered with high impact events as seen on the above DailyFX economic calendar. Arguably the most awaited event is that of the FOMC meeting scheduled tomorrow at 18:00 GMT. The July FOMC meeting did not provide the market with noteworthy clues to future policy direction. Hopefully the August FOMC meeting can deliver more concrete directives as to how the Federal Reserve may proceed with forward guidance.

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COT REPORT SUGGESTS FURTHER DOWNSIDE TO COME

US Dollar:

EUR/USD Latest: Fundamental and Political Drivers in the Spotlight

Source: Refinitiv

EUR/USD:

EUR/USD Latest: Fundamental and Political Drivers in the Spotlight

Source: Refinitiv

The COT reports for both the US Dollar and EUR/USD pair point to increases in short exposure on USD. This fuel in USD shorts may be approaching extreme levels which should be observed by EUR/USD traders. Many speculators may add to further USD downside in the short-term as ‘FOMO’ may take precedence over any rational decision making.

The Predictive Power of the COT Report

How to Read the CFTC Report

IG CLIENT SENTIMENT DATA POINTS TO ADDED UPSIDE FOR EUR/USD BULLS

IGCS shows retail traders are currently markedly short on EUR/USD, with 69% of traders currently holding short positions (as of this writing) which corresponds with the COT report mentioned above. At DailyFX we typically take a contrarian view to crowd sentiment, and the fact traders are net-short is suggestive of further upward momentum.



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 0% 8% 5%
Weekly -1% 17% 11%

STRATEGY MOVING FORWARD: HOW WILL Q3 PLAYOUT FOR EUR/USD?

With so many ongoing and future macroeconomic and political events in question, it is difficult to have any certainty of a long-term directional bias. This is why traders may look to capitalize on the indecision and forecasted volatility to combat the sheer number of variables involved.

The short-term outlook seems to remain bullish but EUR/USD trader’s need to keep a close eye on all upcoming events. Risk management is extremely pertinent now with global uncertainty and the expected surge in volatility, so traders should employ sound risk management technique.

Key points to consider:

  • Long -term: Symmetrical diagonal trendline resistance
  • Short-term: 1.1916 horizontal resistance
  • FOMC meeting tomorrow
  • Market sentiment – IGCS and COT data

— Written by Warren Venketas for DailyFX.com

Contact and follow Warren on Twitter: @WVenketas

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