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EURUSD bounces off 1.1500

By David Morrison  |  07/08/2018 14:40

The euro rallied in early trade and continues to hold within a range. Could this mean the dollar is due a pull-back now if the market has already priced in two more rate hikes from the Fed this year?

Once again, the EURUSD has found some support just above 1.1500 - a nice, comforting round number perhaps, but with little apparent significance as a technical level. Looking at the daily chart below we can see that the pair has been trading above this level for over a year now and it pretty much marked the low following the sharp sell-off in the euro between mid-April and the end of May this year.


The only way I’ve managed to conjure up some technical significance for this level is by fiddling around with a Fibonacci Retracement and taking the February 2017 low just under 1.0500 as my starting point. While there’s always a subjective element in choosing the low and high (or high and low) points for the Fib, I can’t help feeling that this is cheating a bit. After all, the multi-year low for the euro (around 1.0340) was hit just six weeks earlier. Surely this would be the more ‘honest’ place to begin as it’s a far more significant low? True, of course. But it just doesn’t work as well, and I can justify using the Feb level as it follows on from a bounce and a corrective pull-back which does validate 1.0500 as another important level for the currency pair.

Anyway, we’ve got some support for the EURUSD around 1.1500 although the question now of course is just how robust it may prove to be. Fundamentally, interest rate differentials strongly favour the dollar, but then that’s been the case for years now. The Federal Reserve began hiking rates in December 2015 and took its key fed funds rate up to 2.0% two months ago. It also began reducing its balance sheet (reversing quantitative easing) last year. In contrast, the European Central Bank’s (ECB) Main Financing Rate remains at zero while it continues to provide monetary stimulus through its monthly bond purchases. This Asset Purchase Programme (APP) is scheduled to end this December, but the ECB has made it clear that it could still be extended should inflation decline again. Despite this disparity in monetary policy which should favour the dollar, we saw the euro rally substantially throughout 2017. But analysts are now wondering if a fresh demand for dollars at a time when the Fed is actively withdrawing stimulus could reverse that move completely.

Certainly, large speculators have increased their bullish bets on the Dollar Index for the fifteenth consecutive week. This is the highest overall bullish positioning since May last year and has been one of the driving forces behind the Dollar Index’s retest of resistance around 95.00. But there’s always a danger that this kind of one-sided positioning can lead to a sharp price sell-off should the dollar rally run out of steam. It doesn’t take much of a pull-back to loosen weaker speculative hands. Then selling gathers momentum as speculators rush to cover positions. We saw a bit of that this morning in the Dollar Index. The question now is whether fresh buyers come in and try to push the dollar higher, or if the selling pressure increases.

Chart-wise, there’s an area of resistance that’s built around 1.1760 or so, roughly in line with the 38.2% Fibonacci Retracement of the Feb 2017- Feb 2018 rally. A break above here would make 1.2080 the next upside target with the possibility of a ‘head & shoulders’ developing. But if 1.1500 doesn’t hold then 1.1300 comes into play on the downside.
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