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EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

John Kicklighter, Chief Strategist

EURUSD, Nasdaq 100, Netflix and CADJPY Talking Points:

  • With the US inauguration of Joe Biden passing without incident, there was a ‘relief rally in risk certain risk assets
  • Nasdaq 100 outpaced peer US indices with a gap and advance to record highs which suggests there is a particular charge for risk trends over ‘value’
  • An active fundamental drive is now necessary for sentiment to keep running, but perhaps the ECB’s view of the Euro will be enough for a EURUSD break from 1.2150-2050
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Risk Appetite That Doesn’t Show Across the Board

Once again, we were faced with a market whereby your preferred benchmark could relay a very different picture of risk appetite in the markets. That is perhaps not a surprise if we trace back motivation to the passage of President Biden’s inauguration. If I were to use the top measures of the most ubiquitous asset class in the world’s largest market, we were once again presented with record highs. The major US indices were pushing records though there was a noticeable scale of performance from the small-cap Russell 2000’s 0.4 percent gain to the blue-chip Dow’s 0.8 percent advance to a more robust 1.4 percent drive for the most financial derived index the S&P 500. The chart topper, however, was the Nasdaq 100 which gapped higher and extended a run totaling 2.3 percent in gains. It wouldn’t be a stretch to suggest that Netflix’s earnings Tuesday evening helped revive the dubious suggestion that the largest tech companies can flourish in spite of the pandemic. That doesn’t exactly reflect a universal picture for ‘risk on’.

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Chart of S&P 500 with 20-Day Moving Average and Divergence (Daily)

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created on Tradingview Platform

Looking to other measures of global sentiment, the picture was almost listless. In European and Asian indices, such as the DAX, FTSE 100 and Nikkei 225, it looked like mere water treading. Risk-tinged commodities like crude oil and copper were actually struggling while the EEM emerging market ETF earned a solid gap higher during New York trade but no follow through. Notably, more recent months’ favorites Tesla and Bitcoin were outright struggling. The cryptocurrency may find itself at a crossroads after the likely next US Treasury Secretary, Janet Yellen, said in her nomination hearing that the asset class should be regulated owing to its use for illegal financing. In general, the concentrated risk appetite in certain US indices may be in part due to the inauguration. After a mob stormed the Capitol building, there was a tangible security concern. Having the event pass without incident wasn’t exactly the opening of a speculative run, but it did offer an opportunity for ‘relief’. Trends are not founded on relief rallies.

Chart of Bitcoin with 20-Day Moving Average and 5-Day Historical Range (Daily)

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created on Tradingview Platform

Staging for an Inevitable EURUSD Break

Where the strength from the US indices was particularly prominent, the underwhelming restraint from the US Dollar was just as resounding. It seems the restrained transition of power was not a point of strength for the local currency and the many assets its represents – which further suggests the foundation of risk appetite is a chase of prevailing momentum. The Greenback may have also found its footing last week on the basis of a tentative risk aversion that has been thoroughly squashed the past few days. Here too, Yellen’s remarks may carry some latent weight. Her refusal to back the ‘strong Dollar’ default policy of her predecessors may make uncertain bulls even more wary of taking the risk of attempting reversal.

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Chart of DXY Dollar Index with 20-Day Moving Average (Daily)

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created on Tradingview Platform

While the general course for the Dollar would be best served by the guidance of a clear fundamental theme, we are presently lacking for an explicit motivator. While there is potential in risk trends, relative growth (January PMIs are due Friday), monetary policy comparisons (Fed is next week) and more; the issues are currently in uneasy balance. With that in mind, the recent congestion can draw serious debate as to whether the next move for the benchmark currency will be higher or lower. Indeed, my poll asking whether Twitter market participants believe EURUSD will clear immediate resistance at 1.2150 or support at 1.2050 is essentially evenly split.

Twitter Poll Asking Whether EURUSD Will Break Immediate Resistance or Support

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Poll from Twitter.com, @JohnKicklighter

To give context to the technical importance of the aforementioned levels, it is useful to look at the pair from a high and medium-timeframe. The prevailing trend for the majority of the past year is bullish, but support here represents less prominence. A combination of the 50-day moving average and 38.2 percent Fibonacci retracement from the past three-months, 1.2050 is quickly backed by the midpoint of the same range and the congestion high established between August and November (at 1.1975). While recently broken, the 1.2150 level carries more weight as neckline of the broken head-and-shoulders pattern and more consequentially the mid-point of the Euro’s range back to its inception.

EUR/USD BULLISH
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Change in Longs Shorts OI
Daily -13% -9% -11%
Weekly -26% -10% -17%
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Chart of EURUSD with 50-Day Moving Average (Daily)

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created on Tradingview Platform

Monetary Policy is Up as Key Theme

For Thursday’s session, it seems that the top scheduled theme will revert to a favorite narrative among traders over the past decade: monetary policy. We’ve already run through a few major central banks this past day and there are yet more ahead. Collectively, there is enormous dependency in risk appetite on the stimulus that the world’s largest central banks have infused into the market – though I don’t think that was the aim of the effort nor do I believe sentiment is blatantly treading on a believe in the external support. Yet, it does reduce the perception of personal risk and ‘allow’ for excessive risk exposure. That said, it seems a lower probability that the banks on tap can change the overview of risk appetite as they are either not global scale or unlikely to change policy settings.

Chart of S&P 500 Overlaid with Aggregate of Major Central Banks’ Balance Sheets

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created by John Kicklighter with Data from Bloomberg Terminal

This past session, the Bank of Canada (BOC) and Brazilian central bank did not significantly alter their mix while the Bank of Japan (BOJ) this morning continued its very dovish holding pattern of extremely low yields and targeting the JGB yield, though it would lift its growth forecast ahead. Further into Thursday, there are some smaller central banks – Turkey’s, South Africa’s and Norway’s – which represent the off-chance of localized currency volatility. Most prominent will be the European Central Bank’s (ECB) first gathering of 2021. Given how recently they escalated to their current mix, it is very likely they offer no material change. However, their updated assessment of what lies ahead and a weigh in on the level of the Euro which they have lamented recently could offer up potential for that EURUSD spark.

Chart of Major Central Banks’ Balance Sheets in Billions of Dollars (Monthly)

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created by John Kicklighter with Data from Bloomberg Terminal

A final word on the relative considerations at play in monetary policy. While there isn’t systemic movement in this mix of updates, there is still some notable movement if you look in the right places. With the BOC’s improved outlook for the economy and suggestion that they could allow the assets in their balance sheet naturally roll off, it could represent a natural contraction harkening back to past years where less stimulus translated into a stronger currency. There were noteworthy Loonie moves for USDCAD, EURCAD and particularly GBPCAD. Yet, I like CADJPY as it is still working its way in a well-defined congestion and ready for a catalyst.

Chart of CADJPY with 50-Day Moving Average (Daily)

EURUSD Breakout: An ECB or Risk Charge, Bullish or Bearish?

Chart Created on Tradingview Platform

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

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