Thanks to a disappointing US employment number, the EUR/USD was able to rebound on Friday after selling off sharply the day before on the back of a dovish ECB. Although it was higher at the time of writing, the recent technical damage and a weak fundamental backdrop means the odds for a strong recovery are still slim. However, we will be quick to change our view should price eventually make a higher high above its most recent peak, which currently stands at 1.1420. After all, the spread between German and US 10-year bond yields is still in a state of divergence with the EUR/USD, in favour of the euro. But evidently, traders are not feeling too optimistic on the single currency, with the latest COT report suggesting speculators are net short on the EUR at their most aggressive level since December 2016. However, this points to a potential short squeeze rally, given the almost one-sided trade.
Look ahead: Brexit vote 2.0 and US CPI
It will be interesting to see how this week’s parliamentary vote on UK Prime Minister Theresa May’s revised Brexit deal and US CPI would impact this pair. Barring a few other macro pointers from the world’s largest economy, as we highlighted in our Week Ahead report HERE, there isn’t an awful lot to look forward to from the Eurozone, although German industrial production did disappoint expectation this morning with a month-over-month print of -0.8% vs. +0.5% expected.
Technical outlook: inside bar failure?
As a result of the bounce on Friday, the EUR/USD has created an inside bar candle on its daily chart. It has started this week on front foot and was testing liquidity above Friday’s high around 1.1245 at the time of writing. What happens here today could determine the direction for the next couple of days or so:
- If there is acceptance above this 1.1245 level then we could see a decent bounce, potentially towards the next resistance at 1.1285-1.1300 area.
- However, a failure to hold above this 1.1245 level could see the exchange rate drop and potentially go below the low of last week at 1.1175, where the next pool of liquidity is now testing.
- Subsequent bearish target below last week’s low is at 1.1120 (161.8% Fibonacci extension level)
Overall, we are still leaning towards the bearish argument and think we will see an inside bar failure pattern emerge on the EUR/USD’s daily chart. However, we still think the downside could be limited due the abovementioned yield spread divergence.
Source: TradingView and FOREX.com