Euro’s Last Hurrah Before It Takes A Tumble

It’s more apparent with the dollar index (DXY), the instrument that represents the value of the U.S. dollar relative to its most significant trading partners, but the USD looks substantially oversold and seems as if it’s trying to put in a medium-term bottom. Following less than expected inflation data, and better than expected US data, we may see a highly encouraging bounce, off from a higher low. This will push the US dollar in the lead up to this month’s Fed rate announcement.

This appreciating price level signal is boosted by the price bouncing off the Bollinger band low perimeter and a bounce back into the CCI channel. These signals are also apparent with the EUR/USD pair where you have a fall back into the CCI channel and other momentum indicators, such as MACD, signalling the euro’s recent surge higher is running out of steam. At the current level, there is substantial selling pressure that has met serious resistance (indicated on the chart below). The euro has failed multiple times to convincingly rise above 1.20 and I think this psychological barrier is worth noting because historically Draghi was very assertive in jaw boning the euro down in 2015 when the price was last at a 1.2 handle. Like the DXY, I think we are looking at a bearish double top price formation.

The Fed is widely expected to raise rates on the 14th of December and this likelihood has probably been built into the price but with an inverted yield curve. With recently released positive euro economic data, the euro has been unsurprisingly resilient. It is worth mentioning that there is no ECB meeting in which Draghi may announce a more aggressive form of QE wind-up between now and then, however the next ECB decision is a day later on the 15th of December.

I think that the EUR/USD’s surge could potentially be unwound in the coming days.If we can learn anything from the massive experiment called QE, it’s that fund flows and central bank decisions that attract and repel liquidity are of principle importance. The Fed increasing rates is a big deal though it may seem the financial markets want to brush it off as being inconsequential. When the Fed raises rates in two weeks the market will immediately start predicting the next hike while the ECB continues to deliberate on merely ending its own QE program. As rates continue to rise in the US, their bonds are starting to look more and more attractive in a yield-less world. Even if funds are parked in this asset class temporarily while the rest of the world catches up, this movement should give a substantial boost for US dollar demand.

EURUSD Weekly Chart

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