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Bullish EUR/USD on Positive Bund Yield Correlation As European Political Risk Wanes

Bullish EUR/USD on Positive Bund Yield Correlation As European Political Risk Wanes

Tyler Yell, CMT, Currency Strategist

Point to Establish Long Exposure: Daily Close > 1.0935

Spot: 1.0848

Target 1:1.1050 (Opening Price Week Of Trump Election)

Target 2:1.1300 (November 9 High)

Invalidation Level:1.0725 (Weekly Close Before French Election)

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Fundamental, Sentiment, & Technical Focus:

In the closing bell webinar leading up to the French Election on April 23, we noted a common theme. The options market were putting it all on the potential for a scary outcome on April 23, and if a scary outcome did not surface, there were far fewer buyers of EUR downside insurance (puts) past the election. We noted that we could also see Bund prices fall (Bund YTM’s rise) as well as a risk-on move in European equities like the DAX that may align with EUR upside carrying through. This scenario seems to be playing out so far.

Many will tell you not to chase a gap and sometimes they’re right. Sometimes these traders are also wrong, which is why we’re using the historical resistance of the 55-WMA as a filter to add weight to the conviction that EUR/USD upside could continue with specific risk levels mentioned below.

However, it’s too early to call a victory lap despite the EUR surge. There remains a technical burden that needs to be overcome before we can get comfortable with seeing EUR/USD upside continue. That burden comes in the way of the 55-Week Moving Average that is currently positioned near 1.0930. On the charts below, you can see sentiment, which has shifted to favor EUR/USD upside, Bunds that could be in the process of tracing out a move lower, and EUR/USD that is sitting at a technical “line in the sand.” If EUR/USD can break above the 55-WMA, we could be on our way to taking out the significant levels in early November.

Namely, a close above the 55-WMA would open up the weekly open before the US Election at 1.1050 and the intra-week high on the announcement of the Trump Victory at 1.1300. Those two levels are the targets on this trade that will look for IG Client Sentiment to remain favorable in addition to correlated markets on the move higher. The invalidation of the trade is a close below the Friday close at 1.0725.

Euro Forecast to Continue Higher On Sentiment Shift

On EUR/USD as of April 24, retail trader data shows 33.0% of traders are net-long with the ratio of traders short to long at 2.03 to 1. The number of traders net-long is 21.6% lower than yesterday and 51.3% lower from last week, while the number of traders net-short is 18.8% higher than yesterday and 39.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bullish contrarian trading bias.

Favorable Correlation of Falling Bund Price (Rising Yields) To Higher EUR/USD Could Help Trade:

Created by Tyler Yell, CMT

EUR/USD Faces 55-MVA Test:

Created by Tyler Yell, CMT


Happy Trading!

Tyler Yell, CMT

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.