EUR/USD Trading Strategy: Pending Short

  • EUR/USD may be in for some more losses after 2017 ascending trend line break
  • There are fundamental reasons to believe the pair could continue falling ahead
  • Before a short, best to wait until US jobs data passes and to see if support holds

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The Euro has been losing ground to the US Dollar in recent weeks, descending in a narrow channel after breaking below a rising trend line from April 2017. In fact, its decline occurred alongside broad greenback gains. On the immediate chart below, you can see that the US Dollar basket is now above a falling trend line from January 2017. There are fundamental reasons to argue that EUR/USD may continue falling.

US Dollar Basket rises above descending 2017 resistance

The Fundamental EUR/USD Short Argument

For one thing, the ECB has recently signaled that interest rates could remain low for an extended period of time at their April rate decision. Then, just yesterday softer Eurozone inflation figures crossed the wires. The latter helps build the case that the European Central Bank may stay patient on hiking after its quantitative easing programme runs until September.

Meanwhile in the US, the Fed just had their monetary policy announcement where the central bank prepared the markets for the next expected hike in June. In addition, the Fed also upgraded its views on inflation. With US government bond yields on the rise in anticipation of higher rates in the future, the greenback may continue finding itself appreciating in the near-term.

This presents evidence to argue that EUR/USD could be in for some more losses ahead. However, both fundamentally and technically speaking, there are a couple of things that need to occur before I consider entering short.

On Friday, April’s US jobs report may spark some US Dollar volatility. While the country is expected to add more employees as the unemployment rate drops, average earnings are expected to remain more or less unchanged. The markets have lately been more interested in gains in the latter.

Technical Warning Signs

Then, if you look at the EUR/USD chart below, you can see that prices have paused falling on key support. It is a combination of the January 9th low around 1.1913, the 61.8% Fibonacci retracement and the lower line of the descending channel. Before selling the pair, I would like to see a daily close below this area.

Thus, it would be best to stand aside for now to let critical event risk pass and watch how EUR/USD reacts around near-term support. The pair may also even push above the descending channel. With that in mind, I will check back in on this setup in the days ahead.

EUR/USD above 61.8% Fibonacci retracement

EUR/USD Trading Resources:

--- Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

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