EUR/USD leads rebound as dollar drops
Fawad Razaqzada August 7, 2018 8:18 AM
After a five-day losing streak, the EUR/USD has finally – at least for the time being – put an end to its recent downward trend and was climbing back towards the 1.16 handle. Other major euro crosses were also trading higher, suggesting it was not just the dollar weakness that had helped to underpin the EUR/USD. It remains to be seen however if the rebound is more sustainable this time around or proves to be another dead-cat bounce. After all, this week’s data releases from the Eurozone’s economic powerhouse have not exactly been good. Still, with other euro crosses showing resilience despite the soft data, this goes to show that the euro is actually no longer a weak currency and therefore there is a good possibility that the EUR/USD will be able to resume its rally that began in 2017 from around these long-term support levels.
Soft German data offset by investor optimism
A 4.0% drop in German factory orders for the month of June compared to a much smaller 0.4% decline expected made the headlines. The slump in orders was driven by a drop from non-Eurozone countries and comes on the back of a rise of 2.6% in May. Unsurprisingly, we found out this morning that German industrial production also fell 0.9% in June versus a smaller 0.5% drop expected. Meanwhile the more up-to-date German construction data was not great either as the sector’s PMI barely grew, printing 50.0 in July vs. 53.0 expected. However it was not all doom and gloom from the Eurozone. The closely-watch Sentix Investor Confidence index, which is based on a survey of about 2,800 investors and analysts asking them to rate the relative 6-month economic outlook for the Eurozone, rose 2.6 points in July to 14.7 compared to 12.8 expected. A reading above 0.0 indicates optimism, below indicates pessimism. The fact that it was above zero and higher than the prior reading suggests investors and analysts grew in confidence in July despite all the uncertainty about the trade tariffs and Brexit.
Dollar weaker across the board today
Today’s weakness in the dollar was plain to see: even the GBP/USD was managing to rebound, not to mention the noninterest-bearing gold and silver. The pound was long overdue a rebound anyway after the Bank of England’s tightening of monetary policy last week. Although – as it turned out – the decision was a so-called dovish rate hike, it was a hike nonetheless. Not only that, but it was as hawkish as the BoE could have been given the UK’s current circumstances. So, the dovish hike should have been expected. Also coming back against the dollar was the Aussie after the Reserve Bank of Australia was slightly more hawkish (or less dovish) overnight than expected. But the Japanese yen is where the dollar is showing the most weakness against. The yen has staged a decent rebound ever since the Bank of Japan’s subtle policy tightening last week, when it said it would allow the 10-year JGB yield to deviate up to 20 basis points from zero before intervening.
Dollar may struggle without fresh catalyst
So, the dollar was weaker against a basket of foreign currencies today, and this was further fuelling the recovery of the EUR/USD exchange rate. We are not surprised whatsoever with the dollar’s hesitation at these levels. As we have been banging on about it, the greenback needed a pullback after it climbed to key levels against her rivals but without any fresh stimulus. A hawkish Fed may already be priced in and we felt that Friday’s mixed-bag jobs report was never going to be enough to lift the Dollar Index out of its existing range. So far, it has proved that way with the DXY holding below that 95.50 resistance level.
EUR/USD at long-term support
So, we have early signs of a potential short-term top being formed in the dollar and this could be good news for the EUR/USD and other dollar pairs. The EUR/USD dipped below last month’s inside bar candle at the start of this week before rebounding. If rates go on to break some resistance levels now, such as 1.1620 and 1.1650 then the failed breakdown attempt below 1.1550 could be a sign that the bears have gotten into trouble. This is an important point to take into account given the significance of the long-term 1.1550-1.1600 area, where the EUR/USD had moved sharply from before. An ideal development for the bulls would be if rates go on to break above the most recent high at 1.1745 now, for this will confirm the breakdown attempt as being a failure and thus a bullish reversal. However, if the EUR/USD goes back below the 1.1550 level later on in the week then this may pave the way for a far more significant drop in the weeks ahead. So, it is not out of the woods just yet, despite today’s rebound.
Source: TradingView.com and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.