Point to Establish Long Exposure: Daily Close > 1.1415
Spot: 1.1315
Target 1:1.1712 August 24 High
Target 2:1.1998 2015 Closing High
Invalidation Level: Close Below 21-DMA: 1.1162
Last Thursday marked the first time in two years that EUR/USD closed above the 100-week moving average. Whether or not this technical development is the first fruits of a kick-off higher or now will likely be determined by the Jackson Hole Symposium where Janet Yellen will speak to the theme, "Designing Resilient Monetary Policy Frameworks for the Future."
From a fundamental point of view, one would think the US Dollar should soon strengthen. Interest Rates Probabilities per Bloomberg’s data show traders are now pricing in a rate hike. However, new discussions over the neutral rate”—the rate that signifies the dividing line between an accommodative and a restrictive monetary policy may complicate matters for Dollar Bulls.
Robert Kaplan, CEO & President of the Dallas Federal Reserve recently stated in Beijing that, “a major driver of the decline in the neutral rate is a decrease in estimates of future growth.” Mr. Kaplan also goes on to note that the other forces driving down the neutral rate, which has picked up steam as a driving force of the U.S. rate hike path, seem to be putting long-term pressure on inflation expectations.
Therefore, the technical picture that will be described in more detail below and the fundamental components may be aligning for EUR/USD strength in the coming weeks, much like we saw in late August in 2015:
Trade Setup:
The price chart above (D1 EUR/USD), shows an uptrend in EUR/USD albeit, a choppy one. Here you can see the benefit of buying dips and the peril of buying rips or breakouts. Some traders may prefer to be long here as opposed to a breakout > 1.1415. However, what’s unique about 1.1415 is that since January 2015, we’ve been unable to spend more than a week above this level. Therefore, if we can break higher and sustain that break, it would appear from a technical view to be the clearest precedent for a strong move to and through the August high (1.1712).
Given this environment, a trailing stop would be used above an opposing down-fractal on the daily chart so that the trade would 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.
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 -2.31 as 30% of traders are long. Yesterday the ratio was -2.59; 28% of open positions were long. Long positions are 6.7% higher than yesterday and 10.4% below levels seen last week. Short positions are 4.7% lower than yesterday and 33.3% above levels seen last week. Open interest is 1.5% lower than yesterday and 14.8% above its monthly average.
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. The trading crowd has grown less net-short from yesterday but further short since last week. The combination of current sentiment and recent changes gives a further mixed trading bias.
Key Technical Levels:
EUR/USD – Awaiting A Break-Away Move Above 1.1415
2nd Resistance: 1.1415, June 9 High
1st Resistance:1.1365, August 18 High
Spot: 1.1315
1st support: 1.1162 21-DMA
2nd support: 1.1044 August 5, Low
Shorter-Term EUR/USD Technical Levels for Monday, August 22, 2016
For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.
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