Bullish Price Pattern Brings Monthly High on Radar

EUR/USD Rate Talking Points

EUR/USD trades higher for the fourth consecutive day as the US Dollar weakness against most of its European counterparts, and the exchange rate appears to be on track to test the monthly high (1.1920) as it extends the series of higher highs and lows from the previous week.

EUR/USD Forecast: Bullish Price Pattern Brings Monthly High on Radar

EUR/USD appears to be benefitting from Moderna’s developmental vaccine as the US Dollar broadly reflects an inverse relationship with investor confidence, and key market themes may continue to sway the exchange rate over the remainder of the month amid the limited reaction to the US Retail Sales report.

EUR/USD showed a rather muted reaction to the fresh data prints coming out of the US even though household spending increased 0.3% in October versus expectations for 0.5% print, and swings in risk appetite may continue to sway the exchange rate as the Federal Reserve appears to be in no rush to alter the path for monetary policy.

Fed Vice-Chair Richard Clarida emphasized that “the recovery from the pandemic shock in the U.S. can potentially be much more rapid than it was from the global financial crisis” while speaking at an event held by Brookings Institution, with the permanent voting-member on the Federal Open Market Committee (FOMC) going onto say that the central bank “will continue to monitor developments and assess how our ongoing asset purchases can best support achieving our maximum-employment and price-stability objectives.”

The comments suggests the FOMC will stick to the sidelines at its last meeting for 2020 as the Fed’s balance sheet approaches the record high, and the central bank may stick to the same script on December 16 as Chairman Jerome Powell and Co. “are committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible.”

It remains to be seen if the update to the Summary of Economic Projections (SEP) will reflect a more detailed forward guidance as the Fed plans to “add two new graphs that show how the balance of participants’ assessments of uncertainty and risks have evolved over time,” but key market trends may persist throughout the remainder of the remainder of the year as the crowding behavior in EUR/USD resurfaces.

The IG Client Sentiment report shows 34.61% of traders are net-long EUR/USD, with the ratio of traders short to long standing at 1.89 to 1. The number of traders net-long is 10.29% higher than yesterday and 43.63% higher from last week, while the number of traders net-short is 3.71% higher than yesterday and 0.14% lower from last week.

The rise in net-long interest had helped to alleviate the tilt in retail sentiment as only 32.89% of traders were net-long EUR/USD in late-October, while the recent rise in net-short position indicates the crowding behavior could carry into December even though the exchange rate appears to be on track to test the monthly high (1.1920).

With that said, the consolidation from the yearly high (1.2011) may turn out to be an exhaustion in the bullish price action rather than a change in trendas the crowding behavior in EUR/USD resurfaces, and the exchange rate may stage a larger rebound over the coming days as it extends the series of higher highs and lows from the previous week.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, a ‘golden cross’ materialized in EUR/USD towards the end of June as the 50-Day SMA (1.1772) crossed above the 200-Day SMA (1.1361), with the longer-term moving average still tracking the positive slope from earlier this year.
  • At the same time, a bull flag formation panned out following the failed attempt to close below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) region in July, with the Relative Strength Index (RSI) helping to validate the continuation pattern as the oscillator bounced along trendline support to preserve the upward trend from March.
  • However, the EUR/USD rally stalled following the failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it slipped below 70 to ultimately break trendline support.
  • A similar scenario materialized in September even though EUR/USD traded to a fresh yearly high (1.2011) at the start of the month, with the exchange rate taking out the August low (1.1696) after staging another failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region.
  • Nevertheless, the pullback from the yearly high (1.2011) may prove to be an exhaustion in the bullish price action rather than a change in trend amid the string of failed attempts to close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it breaks of the downward trend carried over from the end of July and recovers from its lowest readings since March.
  • The move back above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) may spur a test of the monthly high (1.1920) as EUR/USD extends the series of higher highs and lows from the previous week, with the next area of interest coming in around 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region followed by the 1.2080 (78.6% retracement) to 1.2140 (50% retracement) area.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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