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Talking Points:

- EURUSD poised for test of key 1.0905 level.

- GBPUSD must clear and hold 1.4995 before further gains possible.

- See the March forex seasonality report for trends in the QE-era.

The start of the week has brought about more pressure on the US Dollar across the board, with traders continuing to close out long-held long positions in the wake of the Federal Reserve's March meeting last Wednesday. Even if the Fed is on pace to become the first major central bank to raise rates at some point later this year (options markets are pricing in October or December as the likeliest periods), the overcrowded long dollar trade dictates the necessity for a buffering period before attention is refocused on a hawkish FOMC policy path.

From a technical perspective, we've seen the short-term US Dollar selling evolve from one of a countertrend nature on the H4 timeframe (defined as indicators pointing higher below their median lines, or rather remaining in bearish territory) to one that hints of bullishness on an intraday basis. Technical indicators on daily and weekly timeframes remain in their respective bearish territories (as measured by MACD and Slow Stochastics), but the near-term developments dictate a more corrective bias across the US Dollar spectrum over the next several days and weeks.

In EURUSD in particular, the market may be taking on a form similar to what developed in February this year. As of last Tuesday, net-short positions in the futures market among speculators rose to 193.8K contracts, just off the yearly high point saturation mark of 196.3K net-short contracts for the week ended February 3. As the market unwound its extreme position - something that undoubtedly also happened after the FOMC meeting on Wednesday - EURUSD began a month-long, 200-pip consolidation mainly between $1.1260 and $1.1460 (with a brief trip around $1.1500). The post-FOMC swing high of $1.1040 may be significant overhead resistance for the foreseeable future, even as the market eyes a test of the key $1.0905 level to start the week.

Read more: Euro Short Covering Underway, but Long-term Outlook Still Bearish

--- Written by Christopher Vecchio, Currency Strategist

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