Bullish EUR/USD: Inflation Rising & Macro Trends

2016-04-12 17:30:00 Tyler Yell, CMT, Currency Strategist

Point to Establish Long Exposure: 38.2% Retracement of March-April Range: 1.1220

Spot: 1.1385

Target 1: 1.11494 October 15 High

Target 2: 1.1712 August 24 High

Invalidation Level: Close Below 61.8% Retracement of March-April Range: 1.1050

Narrative: One question has remained on the minds of Oil Bears since EURUSD began its descent on May 8, 2014:

What will Mario Draghi & the ECB Due Next?

As fear began to creep in about the currency weakening effects of possible ECB action, EUR/USD dropped from 1.3991 down to 1.0460 in early March of 2015. Since then, traders have faced a very frustrating and choppy chart as we’ve oscillated from ~1.05-~1.17 since the low printed over a year ago.

However, the narrative has changed regarding a key dynamic of this trend surrounding the US Dollar strength. Over the frustrating year for trend traders, few doubted the resiliency of the US Dollar, and they simply found themselves frustrated by the unwillingness of the EUR to be sold by their counterparts. Now, we have an environment where EUR strength has continued to be resilient, but with the US Dollar losing its favor from institutions wanting to bid it higher on further rate hikes.

Per the Commitment of Traders report, institutional speculators are no longer interested in the participating in the upside risk of the Dollar Index. Current positioning of long dollar positions are at the lowest in 2-years and options traders currently signal less than a 25% chance for the US Dollar to extend gains against the EUR. If we have seen a near-term peak in the US Dollar Index, it’s helpful to ask what could be setting up for a trade right now, and the fundamental, technical, and sentiment picture keep my focus on EUR/USD upside.

Trade Setup:

I am looking to buy EUR/USD with a limit buy order at the 38.2% retracement of the March-April range near 1.1220 with a stop below the 61.8% of the same range at 1.1050. Price action may continue to be volatile as EUR/USD runs into resistance caused by the lower end of the August 24 range. However, further US Dollar weakening could push the trade in the right direction.

Sentiment shows that a move higher may well be in the cards. Retails sentiment on EUR/USD shows that 33% of traders are long, which favors a forced buying opportunity on a breakout higher. A trailing stop would be used above an opposing up-fractal on the daily chart so that the trade align with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

Sentiment:

Right now, our Trader Sentiment Indicator SSI continues to provide a bullish bias. The ratio of long to short positions in the EURUSD stands at -2.02 as 33% of traders are long. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the EURUSD may continue higher. An increase in net shorts, and a price break higher above Wednesday’s high of 1.1466 would further the expectation for upside.