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Bullish EUR/USD: The Bund Breakdown Favors Upside

Bullish EUR/USD: The Bund Breakdown Favors Upside

2016-09-09 14:35:00
Tyler Yell, CMT, Currency Strategist
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Bias: Bullish EUR/USD

Point to Establish Long Exposure: Daily Close > 1.1415

Spot: 1.1200

Target 1: 1.16119 2016 High

Target 2: 1.1712 August 24 High

Invalidation Level: Close Below 21-DMA: 1.1162

"I've been agnostic on the dollar, but now it's kind of looking like it may break to the downside."

-Jeff Gundlach, Doubleline Capital CEO

Bullish EUR/USD: The Bund Breakdown Favors Upside

The Bund has broken down. I repeat, the Bund has broken down. Historically, a breakdown in the Bund, which has been highlighted with vertical lines has led to EUR strength and specifically against the USD. EUR/USD is overlaid on the Bund chart above.

The recent Dollar rally seems to be another case of the market getting ahead of itself in hopes of a Federal Reserve Rate hike in 2016. US Economic Data has hit a bit of a soft patch, which means that the “data-dependent,” Federal Reserve may continue to hold off on their next hike, especially as global growth prospects continue to drop. Therefore, the recent USD rally may say more about how the market is positioned that prospects for the US Dollar.

Lastly, the ECB failed to take any distinct measures to weaken the EUR on Thursday or provide distinct guidance about buying more Bunds and European Debt, which has led to the fallout in the Bund that you see on the chart above. You can also see that the breakdown has happened at what could be the end of a diagonal. Lastly, what of the more credible market views out there is that of DoubleLine CEO, Jeffery Gundlach sometimes known as the “Bond god.”

As the opening quote shows, Gundlach has taken a negative view towards the USD, and this is admittedly despite the fact that the Fed may hike. To his credit, the market is always forward looking so a rate hike is nearly priced in and forward guidance could pull it lower and propel the EUR/USD higher.

Trade Setup:

Bullish EUR/USD: The Bund Breakdown Favors Upside

The Chart above (D1 EUR/USD), shows an uptrend in EUR/USD albeit, a choppy one that has caused many market participants to turn away. Here you can see the benefit of buying dips and the peril of buying rips or breakouts. Some traders may prefer to be long on a dip towards the 200-DMA (1.1135) or the 61.8% retracement of the recent zone at 1.10862 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.

Sentiment:

Bullish EUR/USD: The Bund Breakdown Favors Upside

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 -1.75 as 36% of traders are long. Yesterday the ratio was -2.03; 33% of open positions were long. Long positions are 5.7% higher than yesterday and 8.3% below levels seen last week. Short positions are 8.9% lower than yesterday and 14.5% above levels seen last week. Open interest is 4.1% lower than yesterday and 4.1% 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 a 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.

Shorter-Term EUR/USD Technical Levels for Friday, September 9, 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.

Bullish EUR/USD: The Bund Breakdown Favors Upside

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