EURUSD: A fool and his money are easily parted

You'll notice I didn't start this blog post with "Trade Idea" and that's because I don't have one, but given a lot of my focus is on currencies I had to at least acknowledge the EUR at some point. I'm going to outline a few things I'm watching in the EURUSD chart and talk about a few things which might become interesting, but I certainly don't have an outright EURUSD position at the moment, and I think the sidelines is the place to be until post-ECB. 

Please also forgive some of the charts in today's post, I'm experimenting with MT5 and haven't quite got to grips with everything yet! 

The Big Picture: 

Source: cTrader MT5 Platform 

EURUSD has recovered much of its recent losses which saw the currency pair drop below 1.17 in mid-August. On Friday, EURUSD even challenged 1.19 for the first time in a fair while. As is marked by the massive red channel in the chart above, the uptrend since then has been fairly persistent and generally stayed within those marked boundaries. 

However, we have some resistance lying ahead, and on Friday the high pretty much perfectly coincided with the previous high at the end of July at 1.191. This is the first reason for my caution. We could have some pretty tough resistance around here and also as the currency moves higher we get closer and closer to the key psychological level of 1.20. 

If I were feeling brave, I might fancy a small long position if we were to get back to the bottom of that channel. But given the further resistance ahead I'm not sure the reward justifies the risk and with the ECB ahead it seems a little foolhardy to enter such a position.

The ECB: 

With the ECB later this week, it is never a good idea to underestimate quite how dovish the meeting could be. In order to have a bit more conviction on getting long, I'd want to see a bit more hawkish rhetoric from the ECB as well as some kind of discussion as to what happens when the PEPP envelope ends (currently scheduled for March). If that is it and the ECB returns to just its Asset Purchase Programme, then this could be quite bullish for the EUR. 

Later this week, I will be publishing in a bit more detail on the ECB decision, but my base case is they remain persistently dovish on the whole and continue to see inflation as transitory. This could add some downside pressure. 

The relationship between FX and yield differentials has also strengthened in 2021. The chart below shows the differential between the 10y Treasury and 10y Bund and you can see a pretty clear inverse relationship between that and the EURUSD rate. In other words, if the ECB is exceptionally dovish still on Thursday, we could see Bunds rally (price up, yield down), and this could lead to EUR weakness. This seems to me quite possible given the hefty sell-off (price down, yield up) Bunds have been on in the past couple of weeks. 

Source: Bloomberg

To the downside: 

For me, if that trend channel breaks I would definitely want to be trying a short position in EURUSD with an initial target of c.1.18. This could be extended down to 1.176 if the momentum is there to the downside. 

Longer-Term: 

I'm generally quite constructive on the EUR as I do still think Next Gen EU can actually catalyse the Eurozone periphery a little which might help to drive some decent growth. It's also a nice stepping stone for a closer fiscal union which might finally help the EU sort out a number of its issues. I can quite easily envisage EURUSD ending the year around a 1.20, but much will depend on the ECB and its plans post PEPP. 

Any question, as always, please reach out and let me know. I know this has been a bit of a rambling explanation, but the central view is, wait until the ECB is done before getting involved in a EURUSD trade. 

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