Learn to Trade – Currency Overview 29th July
Focus on the Euro (EUR/USD)
The last week has seen the Euro drive higher. The market is currently lying just shy of the major 1.3100 resistance level. The drive higher has been led by a continuation of bullish momentum across risky asset classes.
Thoughts from the trading floor
The technical picture continues to favour the bears in the medium term. The short term outlook has shifted however to a bullish skew. Gains made through the 1.3095-1.3300 medium term resistance area may see a sharp turnaround in the medium term outlook resulting in further gains to the 1.3800 handle. Thus it will be important for medium term bears to protect this strong resistance area. Thereafter a move to back below the 1.2694-1.2739 should be the catalyst for a reversal of the recent short-term upward trend. Ultimately a move to back below the 1.2490 level would then target the YTD low prints at 1.1876 and signal the resumption of the longer term downtrend.
The last week has continued to see positivity seep back into risk markets, which has aided the Euro higher. With peripheral debt spreads trading in a relatively mute trading range there has been a lack of fresh negativity to catalyse the next leg lower in the Euro. Also the peripheral bond markets around Europe have continued to see demand for that debt at the auctions. Last week also saw the release of the European banking stress tests. The results confirmed most participants’ expectations that the tests were engineered to allow banks to pass comfortably, thus merely an orchestrated PR exercise by European authorities. However this has served to remove any immediate term downside fears from the market.
Interestingly we have also seen the recent trend of the USD underperforming low yielding currencies vs. the high yielding currencies confirmed as a new market flow. This would suggest that perhaps the move higher in the Euro (which is regarded as a low yielder now) is a fairly temporary phenomenon as participants remain quite cautious in assuming risk and the moves in the low yielders is a bout of capitulation of long USD positions.
Bull View
The bulls have steadily edged back into favour over the last 4 weeks. They will look for the market to make a convincing break of the 1.3100-1.3300 in the coming week or two. This should then set the tone for renewed momentum to the 1.3800 handle.
Bear View
The bears will look at the recent creep higher in the Euro as a short-term recovery in the anticipation that the market sets itself up for an extended drop later on in the year. They will also look out for the fact that if the US economic recovery gets derailed, which showed it some signs of this last month, then rather than being bearish USD and bullish Euro it may instead mean that the world refocuses on all the bad news currently in the market causing the Euro to collapse further.
Futex View
We continue to favour the bears in the medium and long term; however we have turned somewhat bullish in the immediate to short term. We believe that the Euro should stall around the 1.3100-1.3300 area by the end of the summer, before setting itself up for another drop going into the autumn.
