After being away from the markets,
nothing has fundamentally changed over the past two weeks. Equity indices in the US are still at or near their all-time highs, with the S&P 500 teasing its ATH in a tight consolidation just below it. Similarly, the US dollar is trending lower still, which has allowed the
price of gold as well as the EUR/USD to break higher, and the likes of USD/CAD and USD/JPY lower. Yields on 10-year government bonds have also dropped after popping higher last week, although remain above their recent lows. There isn’t an awful lot in terms of data this week, as my colleague Victor Golovtchenko wrote on Monday
HERE.
The dollar continues to fall with
investors expecting the Fed to maintain its expansionary monetary policy for a long time, owing to concerns the persistence of Covid-19 will weigh on economic recovery. In fact, there have been signs recovery at the world’s largest economy has already slowed down with the Empire State Manufacturing Index printing just 3.7 on Monday compared to 14.6 expected. There isn’t much data to look forward to today, except for US building permits and housing starts at 13:30 BST.
The greenback is also suppressed because of the lack of haven demand for the reserve currency, with investors evidently favouring foreign currencies, gold and bitcoin instead. The euro (as well as some commodity dollars) has been performing exceptionally well and I think it is all to do with the fact the
Eurozone has dealt with the virus outbreak better than the US. A big test for the euro will come on Friday when the latest flash PMI data are released from around Europe. Meanwhile, investors are also pricing in the prospects of
business-friendly Donald Trump potentially losing in the upcoming general election, which could lead to outflows from US stock markets and therefore lessen the demand for US dollars from foreign investors.
EUR/USD testing big levels
As investors weigh the above macro factors, the EUR/USD is testing some significantly important technical levels right now:
Source: TradingView.com and ThinkMarkets
As the quarterly chart in the inset shows, rates have broken the first of the two long-term bearish trend lines. The second one is not decisively broken yet. If the EUR/USD manages to hold above 1.1900 old resistance now, then it could gear up for a move to the psychologically-important 1.20 handle next. The bulls would like to see a close above 1.19 today.
However, given the fact the EUR/USD is testing these significant levels, I would be cautious on being too aggressive on the long side here. This does not mean I would be shorting it. I would only look for bearish setups when the chart tells me it is the time. That said, the first potential bearish scenario would present itself if we go back below today’s earlier low at 1.1865. However, what I would be looking for is a complete breakdown in the trend of higher highs and higher lows. Thus, should the EUR/USD break its most recent low around 1.1695 then at that point I would turn decisively bearish.