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Euro Breakout or Fake-Out? EUR/USD, EUR/JPY Surge to Fresh Highs

Euro Breakout or Fake-Out? EUR/USD, EUR/JPY Surge to Fresh Highs

James Stanley, Senior Strategist

Euro, EUR/USD, EUR/JPY Price Analysis

  • The Euro has had a strong week on both the charts and the headlines.
  • Hopes are high for deeper European economic integration as the continent battles back from the coronavirus slowdowns – but will it hold?
  • The big item for the Euro on next week’s economic calendar is the European Central Bank rate decision on Thursday morning. To learn more about the ECB, there’s an entire sub-module dedicated to the role of Central Banks, the ECB included, in the fundamental analysis portion of our recently revamped education section.

Euro Rallies, EUR/USD Fresh Two-Month-Highs

As the world continues the healing process from the novel coronavirus, history is being made in Europe. We don’t yet know what the story will say, but we did get an important chapter in that theme over the past couple of weeks as the European economy has received aid from the fiscal and, looking to next Thursdsay’s ECB meeting, possibly the monetary side of the ledger, as well.

The single currency has been beset by multiple items of political uncertainty in its short 20-year life. And this uncertainty has created strife within the bloc, particularly around the 2011 European Financial Crisis in which the ‘PIIGS’ of Europe were put in the difficult spot of facing economic pressure without the ability to weaken their own currency. More recently, the potential for fireworks between Brussels and Rome grabbed the world’s attention, as the European Commission looked to put a cap on Italy’s spending; bringing to question just how sovereign a country within the European Union may continue to be.

But the silver lining of stress is that it can produce strength; especially if that stress is overcome, and while the coronavirus is still too much of a threat to be looked at as anything but a negative, there is the potential for tighter European integration as the continent bands together to rebuild economies that have ground to a halt with coronavirus shutdowns. Frankly – every nation in Europe needs each other, and that may produce the type of integration that was initially hoped for when the single currency went into circulation.

At this point, EUR/USD is breaking out to a fresh two-month-high as hopes appear geared for continued recovery. The pair has finally broken back-above the psychological 1.1000 handle after two bouts of resistance showed in that zone previously in the month of May.

EUR/USD Four-Hour Price Chart

EURUSD four hour chart

Chart prepared by James Stanley; EUR/USD on Tradingview

It’s the Debt

The importance of last week’s announcement of the European Commission issuing joint debt could turn out to be an important inflection point. I say ‘could be,’ because we’re still not there yet and a number of items could go awry. But the simple fact that the EU is looking to issue debt that could then be disbursed to member states is significantly different than the prior arrangement in which European states were left to raise their own debt and manage their own budgets, all while prescribed to the monetary policy of the European Central Bank.

Joint debt could be an important part of deeper European integration. The big question now is how far this might go or whether any nation states balk at the prospect, as they have before; or whether the current crisis forces that deeper bond that would likely be necessary for the continent’s economy to truly prosper as they had intended.

Why this matters – it could be a very valid reason to have a bit more confidence in the longer-term sustainability of the Euro. Instances such as 2011, when nations within Europe are fighting amongst each other or such as 2017 when Italy threatened to up-end the Euro-Zone only served to erode what confidence was left that Europe would more deeply integrate. But – for the single currency to remain viable that will likely be needed, and that announcement last week was an important step in that process.

Taking a step back on the Euro chart, and the EUR/USD pair was teetering on the brink of possible disaster. A trendline connecting the 2001 and 2016 swing lows has been helping to hold support over the past three months. This late-May vigor has helped to prod prices off of this support zone; giving hope that this recent fundamental theme and the prospect of deeper integration can prod the pair-higher.

EUR/USD Monthly Price Chart

EURUSD Monthly Price Chart

Chart prepared by James Stanley; EUR/USD on Tradingview

The Road Ahead

EUR/USD has spiked recently and there are a number of potential resistance zones sitting ahead. The 1.1187-1.1212 zone is of particular interest, as this area has been in-play in the pair in various sways over the past half-decade. Just above that, another area of interest exists around the 1.1448-1.1500 area; and this is followed by the 1.1815-1.1850 area that helped to hold resistance in the summer of 2018.

EUR/USD Daily Price Chart

EURUSD Daily Price Chart

Chart prepared by James Stanley; EUR/USD on Tradingview

EUR/JPY Spikes to Fibo, Psychological Resistance

For those that’d like to look at manners of fading this recent bout of enthusiasm in the Euro, EUR/JPY may present an area to investigate. Much like EUR/USD, the pair has been charging higher for the past week. But in EUR/JPY, that spike has run into a big zone of resistance and this is an area that could possibly produce multiple reasons for sellers to come into the equation. The level of 119.90 is the 61.8% retracement of the 2000-2008 major move in the pair; and just ten pips above that is the 120.00 big figure.

EUR/JPY Daily Price Chart

Please add a description for the image.

Chart prepared by James Stanley;EUR/JPY on Tradingview

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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

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