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Talking Points:

  • In the span if just over 12 months, EUR/USD has rallied nearly 2,200 points or 21 percent from more than decade lows
  • With the benchmark pair's impressive charge, we have moved against fundamental current and cleared key technical levels
  • To decide whether we should call pause or reversal, we should first determine what is moving the markets and then analyze

What is the 1Q fundamental and technical forecast for the Euro? Sign up for the 1Q forecast and Top Trades guides on the DailyFX Trading Guides page to find out.

EUR/USD has put in for incredible volatility and trend over the past week, month and year. In just the past week, we have seen this benchmark pair charge more than 2 percent and tag 1.2500 - a level last seen three years ago. In the past month, we have taken out technical resistance that can be registered on a multi-year and even historical chart - the midpoint of the 2014-2017 bear wave and the center of the pair's absolute high and low since inception back in 1999. In the span of just over a year, the tally is a recover from a more-than-decade low to the tune of 2,190 pips or 21 percent. These are extraordinary accomplishments and pace which should naturally draw our attention as speculators along with the question of whether this charge continues or tops.

EURO CoT Net Futures Positioning

Thursday's Sharp Turn

Statistically, it is wise to stick to well established trends especially when momentum is unbroken. That said, we saw a dramatic technical punctuation this past session to called the commitment and capacity of the bulls into question. What was initially the worst week in nearly two years for the US Dollar turned into one of the most impressive intraday rebounds in over a year. For the EUR/USD specifically, the quick turn produced the biggest 'upper wick' since the final trading day of 2016. Though there were a number of factors contributing to the about face, one of the most prominent sparks were comments from US President Donald Trump in support of a strong Dollar which seemed to overturn the remarks made by Treasury Secretary Steve Mnuchin. It also happened in the vicinity of the next major range of resistance near 1.2600 where the 61.8 percent Fib retracement of the 2014-2017 decline meets the upper bound of a multi-year descending trend channel.

EUR/USD Wicks

Moving Against the Fundamental Current

What is arguably the most impressive aspect of the EUR/USD's charge this past year is that is runs against the fundamental current. Whether we judge by relative interest rate forecasts, temporary advantage from protectionist shift or even a slight advantage in growth; the traditional numbers favor the Dollar over the Euro. To appreciate whether the pair is more likely to continue with its course or put traction to a reversal, we have to better appreciate what has motivated it to this gravity defying run. On a technical basis, three years of consolidation at decade lows changed the speculative balance usually found in momentum. Fundamentally, the deep discount registered primarily in 2014-2015 accounted for the a wide disparity in an extreme dovish shift from the ECB while the Fed was starting its turn towards tightening. That divergence was worth 3,500 pips, but further progress would require significant escalation of the discrepancy. And, finally conditional or systemic analysis found a general market environment where yield or momentum were necessary to keep the markets attention, neither of which were offered up.

@JohnKicklighter poll from twitter

What to Watch for Judging Trend or Reversal

With the current mix of influence in mind, we know what trends to track and what technical signals to monitor. Fundamentally, the promise of infrastructure spending and onus of protectionism remains the Dollar's advantage. The very early speculation that the ECB would signal its intention to take more definitive steps towards policy normalization with its forward guidance was tempered by President Draghi Thursday while the market's Fed forecast is warming the possibility of even four 25 basis point rate hikes in 2018. Meanwhile, futures markets show speculators are holding a record net long Euro position. We should qualify our call one way or another with a technical signal. Depending on whether you are consecutive or risk tolerant, bullish cues could come with a clearance of 1.2600 or 1.2750 while a bearish call may come on a slip through 1.2365 or perhaps 1.2175. Regardless of what direction and entry you chose, know why you are doing it. Have a plan. We discuss the question of 'reversal or continuation for EUR/USD' with supporting analysis in today's Quick Take Video.

Monetary Policy Perception Chart

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