Euro Failure at 1.3150 Warns Sentiment May Have Hit Extreme
Fundamental Forecast for Euro: Neutral
- Second quarter European economic growth beats expectations, Euro strengthens
- Euro, British Pound advance against the US Dollar as risky assets gain
- Our Technical Strategist believes Euro longs against the Australian Dollar, Swiss Franc attractive
Fresh multi-month highs in the US S&P 500 and other financial asset classes made the risk-sensitive Euro top-performing G10 currency through the past week of trade, but a late-week reversal warns of a potential turnaround after significant gains. The EURUSD finally broke out of its tight month-long range on a surprisingly sharp US Dollar tumble. There was ostensibly little ‘reason’ for US Dollar losses, but we had earlier warned that currencies were poised for breakouts after an extended lull in volatility. The Euro’s next moves may be especially important as it has thus far shown relative inability to challenge multi-month highs against the US Dollar.
A relatively empty European economic calendar suggests that the Euro will need to take its cues from broader financial market sentiment and price swings. Traders should nonetheless watch for any especially large surprises out of upcoming German IFO business confidence results, while Euro Zone Consumer Confidence and other second-tier economic reports could also affect markets. The recent upswing in the US S&P 500 and broader financial market risk sentiment favors Euro gains against the safe-haven US Dollar. Yet examination of FX Options market sentiment suggests that the Euro may have reached an important sentiment extreme through very recent trading.
The speed with which the Euro broke out of its long-standing range warns that markets can and will shift direction at a moment’s notice. As such, EURUSD behavior near important congestion resistance at 1.3150 may prove especially significant. If we do see the single currency trade above said resistance level, there is little in the way of a test of 5-month highs above 1.33. Otherwise, a retest of recent congestion support closer to 1.2800 seems the more likely outcome. - DR
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