Among the majors, the AUD/USD and EUR/USD have been noticeably higher today while gold and silver managed to add to their gains from the day before.
The EUR/USD has been in the news as market commentators speculated that the European Central Bank will intervene to lower the exchange rate. While the ECB has indeed talked about the strong euro in terms of its negative impact on inflation and exports, the central bank has insisted that targeting a particular exchange rate is not in their mandate. Consequently, the euro has recovered as traders don’t expect the ECB to intervene at current levels. The market is now testing the ECB by bidding up the EUR/USD and is curious to find out what the line in the sand is for them. I reckon it is somewhere around $1.25, but at the same time the central bank will not want to be considered a currency manipulator. So even if the EUR/USD gets to $1.25, this won’t necessarily cause a policy response. But the ECB will act if exports are hurt or disinflationary pressures rise – the cause could well be the EUR/USD, but it doesn’t necessarily have to be.
There is also too much negativity towards the EUR/USD, which is another reason I reckon it may go up further over time.
Technically, the EUR/USD’s long-term bullish trend remains intact, but it is now testing short-term resistance around 1.1735 to 1.1750, an area which was support prior to last week’s breakdown. This area also markets the neckline of the head and shoulders pattern that one can see on the daily chart (in the inset, below). Logically, rates “should” go down from here. BUT what I am interested to see is whether this H&S pattern will fail and price instead goes up and thus trap the bears. This is something the EUR/USD had done previously in 2017 as you can see on the weekly:
Source: ThinkMarkets and TradingView.com
The above chart shows similarity in price action of the EUR/USD in 2020 with that of the 2017 rally. After a big breakout in 2017, the currency pair then went into a period of consolidation, as it has done so now. But in 2017 it then staged another breakout attempt. If this is anything to go by then the EUR/USD may resume its rally in the not-too-distant future, especially as it has clearly broken its long-term downtrend. I think if we go above the 1.1735-50 resistance area and hold there then that will be the bullish trigger for me, as it would indicate that those who traded the head and shoulders will have been trapped. Just thinking outside the box here; a lot of bearishness on EUR/USD makes me think the pain trade is yet to come for the bears. Anyway, we will cross that bridge when we get there. For now, the short-term trend is bearish, but do watch out for a trap to form based on the above charts.