My complete weekly outlook for EUR/USD.
FUNDAMENTALS:
The euro staged an impressive comeback in the second half of the last week, backed by improving risk appetite and a weaker USD. As the FOMC minutes disappointed hawkish market expectations or eased concerns over a premature tightening (depending on how you look at it), the US dollar finally hit some bids on Thursday and Friday, pushing the pair in the vicinity of weekly highs.
In the euro area, the highlight was the ECB's decision to update their monetary policy strategy and apply average inflation targeting, just like the Fed did a year ago. However, with the medium-term inflation projection standing at only 1.4% for 2023, and ECB's Lagarde confirming that the new strategy won't have any implications on when tightening may come, it's hard to believe markets will pay any focus to this. Or, as ECB's Schnabel puts it, "The new inflation target safeguards our room to maneuver and benefits people."
What's more important is the EUR reaction to all of this - if the new strategy won't affect ECB's tightening decisions, then this could actually be positive for EUR.
Latest Headlines:
USD News:
- US 10-year yields grind to a fresh daily high and dollar continues slide
- Biden says he expects congress to act on US debt ceiling
- Fed Monetary Policy Report: Upside risks to the inflation outlook in the near term have increased
- US May wholesale inventories +1.3% vs +1.1% expected
EUR News:
- ECB's Villeroy: Sees French economy growing 10% overall in 2021 and 2022
- ECB strategy review: What was the point in all of this? - MUFG
- EUR/USD preserves daily gains above 1.1850 amid upbeat mood
- ECB Accounts: Members debated reducing bond purchases in June meeting
- EUR/USD Price Analysis: Extra gains likely above 1.1887
Upcoming Market Reports:
Here are the most important market reports for EUR/USD to follow in the coming days (all times are UTC timezone):
The economic calendar for the euro area is quite light (no major reports), which means the EUR/USD pair could continue to follow the dynamics of the USD.
Tuesday at 12:30 (UTC): US CPI m/m
Tuesday at 12:30 (UTC): US Core CPI m/m
Wednesday at 12:30 (UTC): US PPI m/m
Wednesday at 16:00 (UTC): Fed Chair Powell Testifies
Friday at 12:30 (UTC): US Core Retail Sales m/m
Friday at 12:30 (UTC): US Retail Sales m/m
INTERMARKET:
Yields:
US yields closed higher on improved risk sentiment, but not German yields rose even higher, faster. The 2-year yield differential looks bullish for the pair for the upcoming week.
USD Index
The USD index fell below a bullish trendline as investors kept selling the currency amid a better risk mood. This also partly explains the negative correlation of the USD with rising US yields on Friday, but the 92.00 level (combined with higher yields) could provide a short-term support for the currency early next week.
SENTIMENT:
CoT:
The latest CoT report, covering positions up to the prior Tuesday, showed that speculative accounts cut their bullish positions in the EUR by $1.5 billion, marking the largest adjustment of any major currency. EUR shorts now sit at the highest since March 2020.
Did investors speculate on a possible dovish tilt in the ECB strategy review? Now that ECB's Lagarde clarified that the new strategy won't impact tightening decisions, short-covering could have a significantly positive impact on the EUR.
In the USD, shorts were slashed for the third consecutive week with a reduction of $2.3 billion. Nevertheless, the net positioning remains bearish.
Currency Strength Index:
In the last five trading days, both the EUR and the USD are almost unchanged from their weekly opening price, as measured against all other major currencies (i.e. as a currency index.) The JPY and CHF were the strongest, and the CAD, NZD, and AUD the weakest as a result of lower risk appetite. However, trends started to reverse on Friday as investors turned more risk tolerant.
Risk Reversals:
The latest risk reversals for EUR/USD (as of July 09) indicate that investors are increasingly protecting against strength in the pair, most notably in the weekly options.
* Comment: In the FX market, risk reversals refer to the difference between the implied volatility of the most popular out-of-the-money calls and puts with the same expiration. Higher demand for an options contract increased its volatility and price. Therefore, a positive risk reversal signals that upside protection in the pair is relatively more expensive than downside protection, suggesting that investors are speculating on a rise in the currency.
TECHNICALS
Price-Action:
Despite the impressive bull run on Thursday and Friday, the EUR/USD pair remains in a technical downtrend on the daily chart. Only a break above the weekly high of 1.1895 would imply a fresh higher high and a potential trend reversal on the daily.
The hourly chart shows a ranging market with the weekly high being the next key obstacle for bulls. The intraday uptrend in the second half of the week had strong impulse moves with rather shallow corrections. However, the bull run on Friday shows higher prices on decreasing volume and with low-range candlesticks, signaling weaker demand ahead of the weekly tops.
Levels to follow (Liquidity):
Major resistance: 1.20 (3-week high and round-number)
Minor resistance: 1.1895 (weekly high and 61.8% Fib)
Minor support: 1.1825 (Friday's low)
Major support: 1.1780 (3-month low)
== SUMMARY ==
The EUR/USD pair is on a good way to reach fresh highs in the next week. However, for a clear bullish tilt in the EUR sentiment, we need some encouraging hard data from the euro area. This leaves the pair vulnerable to US reports scheduled for the next week (inflation expected lower, and retail sales expected better.)
Upcoming resistance areas and technicals suggest a potential correction in the pair, possibly towards the Point of Control (1.1835) and Friday's low (1.1825) before yield differentials and positive risk mood push the price higher.
I am looking to trade EUR/USD from the buy side.
Please hit the 'LIKE' button if you find this post useful. Also, don't forget to follow to get more trade ideas like this. Thanks!
FUNDAMENTALS:
The euro staged an impressive comeback in the second half of the last week, backed by improving risk appetite and a weaker USD. As the FOMC minutes disappointed hawkish market expectations or eased concerns over a premature tightening (depending on how you look at it), the US dollar finally hit some bids on Thursday and Friday, pushing the pair in the vicinity of weekly highs.
In the euro area, the highlight was the ECB's decision to update their monetary policy strategy and apply average inflation targeting, just like the Fed did a year ago. However, with the medium-term inflation projection standing at only 1.4% for 2023, and ECB's Lagarde confirming that the new strategy won't have any implications on when tightening may come, it's hard to believe markets will pay any focus to this. Or, as ECB's Schnabel puts it, "The new inflation target safeguards our room to maneuver and benefits people."
What's more important is the EUR reaction to all of this - if the new strategy won't affect ECB's tightening decisions, then this could actually be positive for EUR.
Latest Headlines:
USD News:
- US 10-year yields grind to a fresh daily high and dollar continues slide
- Biden says he expects congress to act on US debt ceiling
- Fed Monetary Policy Report: Upside risks to the inflation outlook in the near term have increased
- US May wholesale inventories +1.3% vs +1.1% expected
EUR News:
- ECB's Villeroy: Sees French economy growing 10% overall in 2021 and 2022
- ECB strategy review: What was the point in all of this? - MUFG
- EUR/USD preserves daily gains above 1.1850 amid upbeat mood
- ECB Accounts: Members debated reducing bond purchases in June meeting
- EUR/USD Price Analysis: Extra gains likely above 1.1887
Upcoming Market Reports:
Here are the most important market reports for EUR/USD to follow in the coming days (all times are UTC timezone):
The economic calendar for the euro area is quite light (no major reports), which means the EUR/USD pair could continue to follow the dynamics of the USD.
Tuesday at 12:30 (UTC): US CPI m/m
Tuesday at 12:30 (UTC): US Core CPI m/m
Wednesday at 12:30 (UTC): US PPI m/m
Wednesday at 16:00 (UTC): Fed Chair Powell Testifies
Friday at 12:30 (UTC): US Core Retail Sales m/m
Friday at 12:30 (UTC): US Retail Sales m/m
INTERMARKET:
Yields:
US yields closed higher on improved risk sentiment, but not German yields rose even higher, faster. The 2-year yield differential looks bullish for the pair for the upcoming week.
USD Index
The USD index fell below a bullish trendline as investors kept selling the currency amid a better risk mood. This also partly explains the negative correlation of the USD with rising US yields on Friday, but the 92.00 level (combined with higher yields) could provide a short-term support for the currency early next week.
SENTIMENT:
CoT:
The latest CoT report, covering positions up to the prior Tuesday, showed that speculative accounts cut their bullish positions in the EUR by $1.5 billion, marking the largest adjustment of any major currency. EUR shorts now sit at the highest since March 2020.
Did investors speculate on a possible dovish tilt in the ECB strategy review? Now that ECB's Lagarde clarified that the new strategy won't impact tightening decisions, short-covering could have a significantly positive impact on the EUR.
In the USD, shorts were slashed for the third consecutive week with a reduction of $2.3 billion. Nevertheless, the net positioning remains bearish.
Currency Strength Index:
In the last five trading days, both the EUR and the USD are almost unchanged from their weekly opening price, as measured against all other major currencies (i.e. as a currency index.) The JPY and CHF were the strongest, and the CAD, NZD, and AUD the weakest as a result of lower risk appetite. However, trends started to reverse on Friday as investors turned more risk tolerant.
Risk Reversals:
The latest risk reversals for EUR/USD (as of July 09) indicate that investors are increasingly protecting against strength in the pair, most notably in the weekly options.
* Comment: In the FX market, risk reversals refer to the difference between the implied volatility of the most popular out-of-the-money calls and puts with the same expiration. Higher demand for an options contract increased its volatility and price. Therefore, a positive risk reversal signals that upside protection in the pair is relatively more expensive than downside protection, suggesting that investors are speculating on a rise in the currency.
TECHNICALS
Price-Action:
Despite the impressive bull run on Thursday and Friday, the EUR/USD pair remains in a technical downtrend on the daily chart. Only a break above the weekly high of 1.1895 would imply a fresh higher high and a potential trend reversal on the daily.
The hourly chart shows a ranging market with the weekly high being the next key obstacle for bulls. The intraday uptrend in the second half of the week had strong impulse moves with rather shallow corrections. However, the bull run on Friday shows higher prices on decreasing volume and with low-range candlesticks, signaling weaker demand ahead of the weekly tops.
Levels to follow (Liquidity):
Major resistance: 1.20 (3-week high and round-number)
Minor resistance: 1.1895 (weekly high and 61.8% Fib)
Minor support: 1.1825 (Friday's low)
Major support: 1.1780 (3-month low)
== SUMMARY ==
The EUR/USD pair is on a good way to reach fresh highs in the next week. However, for a clear bullish tilt in the EUR sentiment, we need some encouraging hard data from the euro area. This leaves the pair vulnerable to US reports scheduled for the next week (inflation expected lower, and retail sales expected better.)
Upcoming resistance areas and technicals suggest a potential correction in the pair, possibly towards the Point of Control (1.1835) and Friday's low (1.1825) before yield differentials and positive risk mood push the price higher.
I am looking to trade EUR/USD from the buy side.
Please hit the 'LIKE' button if you find this post useful. Also, don't forget to follow to get more trade ideas like this. Thanks!
