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Euro Talking Points:

Technical Forecast for Euro: Bearish

The Euro took a turn lower this past week, but the impression of tempo differs depending on which cross you refer. Naturally, the impression of the second most liquid currency in the world is primarily set through the rise and fall of EURUSD. The tumble that this FX benchmark took last week – particularly through Friday –leaves us with the impression of a tumble that could cascade if only it weren’t so close to more critical technical levels just a short extension lower. While there is a certain degree of influence to be expected from the most heavily traded pairing for a currency, a general market state that is reluctant to foster trends and the presence of chart-based boundaries can kill the critical opening phases of momentum necessary to shift congestion to trend. If we are looking for a significant bear trend to arise for the Euro, we will either need to find a critical level such as 1.1100 fall on EURUSD or otherwise see the other liquid Euro crosses mark a wider and faster decline.

With the greatest reach for the Euro – and the FX market in general – EURUSD’s move through this past Friday has significantly altered the outlook. Though the pair had already capped the progress following a critical bear trend breakout above 1.1275 at the very beginning of the week, there was still ready potential that a jolt of volatility could transition a stance of congestion into a revived bull trend so long as it held above that pivot level (former resistance as new support. Instead, the market sliced back through the former ceiling trendline and 100-day moving average in the process of the biggest single-day loss for the pair since April 24th. There are countless, lower-importance technical levels that we can bounce between with each unexpected headline so long as we hold above 1.1100. The upper bound defining a critical turning point in favor of the bulls is now all the way out to the combination of the 200-day moving average and midpoint to 2019’s range roughly at 1.1350.

Chart of EURUSD with 100-day and 200-day Moving Average (Daily)

EURUSD

If the markets lose their sense of conviction to run critical levels, it would be an easy transition back into the well-worn ranges of the past few months. On a lower time frame chart (such as the four hour), we can see many of the stress zones of the past weeks. The 1.1200 to 1.1220 region has stood as general resistance and support through the past four weeks – remember, technical levels do not need to hold to the pip to carry relevance as that is impractical for so many competing participants and motivations in a market of this size.

Chart of EURUSD (4-Hour)

EURUSD

While it is more practical to strategize for range trading, it is important to recognize that the quiet will not hold forever. To truly appreciate the scope of what a transition would represent, the weekly chart of EURUSD presents the relevant levels. Activity measured by the 20-week average true range (ATR) is at the lowest levels since 2014, which was itself a record low. The bear trend leg through 2018 and 2019 fits with a much larger channel that stretches back a decade. While there is sway in levels like 1.1500 and 1.1800, the more substantial resistance to hold up a dedicated bull market would be 1.2200 to 1.2100 where a large confluence of Fibonacci levels and the aforementioned channel top currently coincide. Looking lower, the 1.1100 level is significant even on the larger scale. Overtake that, there may be hesitation around 1.0900 (former inverse head-and-shoulders neckline), but the late 2016 congestion low of 1.0500 to 1.0350 would be the last stop before a systemic reordering.

Chart of Gold with 50-Week Moving Average (Weekly)

Gold.

As we await the next inevitable bolt of volatility in the FX and broader financial markets, it is important to consider which direct a pair like EURUSD will favor should the markets start to shudder. While, we expect the US Dollar to be the ultimate safe haven currency – it sentiment devolves into a sheer need for liquidity – there is more often a positive correlation between EURUSD and the CBOE’s Euro Volatility Index. Consider this a factor in the potential between a large move higher or large move lower.

Chart of EURUSD Overlaid with the CBOE’s Euro Volatility Index (Weekly)

EURUSD

If EURUSD starts to put in for a committed charge moving forward, it may leverage enough influence perhaps to set the Euro itself in motion. The best bet for trend however would be for the EUR to generate traction of its own. Despite a few false starts, the single currency is working with its smallest absolute range in its short history. From an equally-weighted index, we find the Euro’s 12-week (3-month) trading range is indeed the smallest territory for price action as a percentage of current spot. This past week offered up a false bullish break and there was a false bearish break on a two-year support back in April. Volatility is clearly poking at the market. We are just waiting for one of those charges to hold and produce a trend.

Chart of Equally-Weighted Euro Index (Weekly)

EURO

Considering the major crosses for the Euro, EURUSD is perhaps one of the least appealing of pairs. It must be watched for guidance on both the Euro’s and Dollar’s general intent, but the fundamental scrutiny it faces makes it treacherous trading. If we are looking for other pairs that are less bombarded with active crosswinds – the Dollar is exerting serious pressure – then EURGBP may be a more appropriate cross to consider. Brexit is still a major Pound issue to account for, but the campaign to find a new Conservative leader and therefore PM will sidetrack the Sterling. That can make for a more accommodative pair to a charged Euro – particular a bearish turn. Keep tabs on 0.8875 and 0.9000.

Chart of EURGBP (Daily)

EURGBP

In contrast to the bearish potential for favorable winds driving EURGBP, EURCHF stands ready to cater to any strong bullish effort by the Euro. The Swiss Franc has its own fundamental issues, but they are more often drowned out by its larger counterpart’s travails. There is a prominent trendline support (downward sloping) that was reinforced at the beginning of the month at around 1.1150. That is heavily reinforced by a number of overlapping Fibonacci levels including the midpoint (‘50% Fib’) set by past eight years’ range extremes in 2013 and 2015 at that same level. That doesn’t mean the market has to rise, but it is in a better position to exploit such a move if winds shift in that direction.

Chart of EURCHF (Daily)

EURCHF

Without doubt, the most heavily fortified technical pair amongst the Euro crosses is EURAUD. The pair has posted an 8-day run through Friday for the longest stretch since December 2012 – which also happens to be the match the second largest consistent bull move in its record. That alone doesn’t carry that much weight, but against the well-established resistance of range high and long-term Fibonacci levels at 1.6350, it absolutely deserves attention. A motivated bearish swing would best serve the circumstances but even a general drift for the markets could allow finding the technical boundaries exerting pressure.

Chart of EURAUD and Consecutive Candle Count (Daily)

EURAUD

In terms of speculative positioning, there is a strong short interest for key pairs among different groups. For the EURUSD, the longer duration large futures traders are holding a moderate net short after a sharp tumble from a record long interest from last year. This may draw some technical interest in itself. For shorter-term interests, retail FX traders are a mixed back on exposure dependent on the recent momentum experienced by the particular pair. EURGBP is one of the more interesting as its consistent rise has built up a sizable short exposure from the rank and file. Calling tops is what they do, but a trigger is necessary if we are going to see a genuine downdraft.

Chart of Net Speculative Positioning in Aggregate Dollar Futures from CFTC Report (Weekly)

COT

Chart of Retail Trader Positioning from IG Clients (Daily)

EURGBP