Euro Forecast: EUR/USD Testing Multi-Year Symmetrical Triangle
EUR/USD PRICE ANALYSIS:
- Price approaches topside resistance of symmetrical triangle
- Plethora of economic announcements scheduled throughout the week
- US-China tensions in play
- IG Client Sentiment (IGCS) Index favoring bears (short-term)
EUR/USD TRADING AT DIAGONAL LEVEL OF CONFLUENCE
A strong Euro through Q2 has sent the pair soaring over 10% with investors favoring the Euro over the US Dollar during the period. Coupled with seemingly stronger economic policies and direction, Euro bulls remain at the helm. The Euro is gaining more and more traction amongst global investors as a potential alternate safe-haven currency, as reflected in its recent price appreciation.
EUR/USD MONTHLY CHART
Chart prepared by Warren Venketas, IG
The multi-year EUR/USD symmetrical triangle (chart above) is edging ever closer to a breakout point (yellow). The symmetrical triangle is suggestive of a bullish continuation if price breaks above the descending upper trendline resistance. For now, price remains within the chart pattern at resistance, suggestive of a possible short-term retreat. Bears may look to defend resistance around trendline resistance and possibly push prices back towards the 1.1500 psychological support level.
From the bullish perspective, traders will likely look for a monthly candle close above topside resistance before looking at further upside. If the breakout confirmation is observed, initial resistance can be seen at the 50% Fibonacci level around 1.2121 (Fibonacci taken from September 2000 low to March 2008 high).
The EU recovery agreement last week has been swiftly concluded giving additional impetus for Euro bulls. The decisiveness by EU leaders has fostered a positive sentiment around the Eurozone. This can be seen by a dramatic drop off in EUR/USD short positions (see COT report below). Long positions continue to rise with net positions enduring on the long side. This being said, long speculators may increase the risk associated with supplementary short-term upside.
DAILYFX ECONOMIC CALENDAR
The economic calendar is riddled with high-impact US and EU events this week - DailyFX economic calendar above. The biggest drivers will most likely come from the Fed rate announcement, and GDP indicators from both the US and EU respectively. Although the Fed is expected to keep interest rates the same, a secondary stimulus package could be on the horizon aptly labeled ‘CARES 2’.
Although the details of the anticipated package are opaque to market participants, it is likely that the package proposals can create waves within the forex market. Traders will need to monitor these fundamental variables which can cause spikes in volatility and price action.
The US-China spat has recently resurged with a tit-for-tat exchange by both countries with a few opposing consulate embassy’s being shut down. We have seen investors flock to safe -havens when prior tensions have emerged (JPY, CHF and to a lesser extent USD) but recent rebalancing of the US Dollar may give additional support to Euro strength. This relationship will be interesting to examine if tensions continue, as prior flare-ups have resulted in subsequent US Dollar strength (highlighted below). With the Euro being indulged by investors as a possible safe-haven, will future trade tensions produce similar results?
EUR/USD WEEKLY CHART
Chart prepared by Warren Venketas, IG
EUR/USD STRATEGY MOVING FORWARD
Recent Euro strength may be stifled in the short-term, with the overall long-term view firmly bullish as the symmetrical triangle pattern continues to fill out.
Key trading points to consider:
- Key levels – 1.2121 (50% Fibonacci) and 1.1500 psychological level
- Technical indicators – symmetrical triangle formation
- Economic announcements – US rate announcement and US & Euro GDP data
- IGCS and COT report data
IG CLIENT SENTIMENT DATA EXPRESSES SHORT-TERM PRICE REVERSAL
IGCS shows retail traders are net short on EUR/USD, with 68% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment, and the fact traders are net-short is suggestive of further upside however, with the change in long positions exceeding that of short positions the signal suggests a bearish preference.
--- Written by Warren Venketas for DailyFX.com
Contact and follow Warren on Twitter: @WVenketas
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.