Are Euro Bears Done?

Are Euro Bears Done?

Talking Points:

– The Euro surge continues following yesterday’s GDP prints with EUR/USD moving into a key zone of resistance.

– Sentiment in EUR/USD remains stretched at -2.45, and this may be pointing to further upside.

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Probably one of the more surprising events from what’s been a rather climactic 2017 has been the strength seen in the Euro-Zone. As we came into the year, the ECB had just extended their QE program, and many shops were calling for parity on EUR/USD. Given that the U.S. Dollar was surging up to fresh 14-year highs and also taken with the fact that the ECB remained extremely passive and dovish while a considerable amount of political risk was on the horizon, this stance could be justified. But, as we moved deeper into the year, those factors of resistance began to recede: The U.S. Dollar pulled back and then spent much of the first nine months of 2017 moving-lower; and those elections in Europe appeared to resolve in a rather market friendly manner, starting with the first round of French elections in April.

As each of these factors was falling into place for Euro bulls, the single currency just kept marching higher. This was driven by the prospect of the ECB finally starting to step back from their outsized stimulus purchases, and this is similar to what was seen in 2014 in the U.S. Dollar when markets bid the currency-higher well ahead of the widely-telegraphed move of tightening.

As we moved deeper into the year, those expectations for stimulus exit continued to grow with EUR/USD eventually testing the 1.2000 psychological level. But after getting there, the pair ranged with well-defined support around the 1.1700 handle as we neared the October ECB rate decision. When the bank kicked the can on stimulus exit, the Euro fell aggressively as those bets for stimulus-exit or, perhaps even higher rates in 2018 got priced-out of the market. It appeared as though the move of Euro weakness could have some staying power given that the most pertinent factor driving it higher this year was resoundingly nullified when the ECB elected to extend their QE program. That weakness hadn’t even lasted three weeks until bulls began to take over again yesterday.

EUR/USD Four-Hour: Bulls Return Past Week (in Blue), Testing Prior Resistance (in Red)

Chart prepared by James Stanley

The Euro hasn’t yet calmed down after yesterday’s aggressive top-side run. Prices in EUR/USD have moved up to the potential zone of resistance that we looked at that runs from 1.1837-1.1880. These levels are from a group of prior swing-highs that had showed-up ahead of the October ECB rate decision, and this was the prior resistance swing ahead of that ECB rate decision. After that announcement, the Euro swung-lower after the ECB kicked the can on stimulus exit, and this also led to a topside break in the U.S. Dollar as the Greenback surged up to fresh three month highs.

But since then we’ve seen some change, and this has brought impact currency markets. Many are looking for reasons or explanations as to why this move might’ve transpired as aggressively as it has over the past couple of days. Many are pointing fingers at US tax policy, others are accounting the move to the strong European GDP prints early in the session yesterday. Given the timing of this bullish move, it would appear as though both drivers are playing a part while yesterday’s GDP prints are what has caught the most attention. Yesterday’s German GDP was red-hot, with quarterly growth of .8%. This helped the Euro-Zone as a whole grow by .6%, and this puts the European economy on pace to grow faster than the United States. Meanwhile, the Fed has hiked rates four times over the past two years and the ECB has yet to move off of their outsized asset purchases and negative rates. There’s some divergence here, and it appears as though currency markets are still trying to get ahead of any potential tightening from the ECB.

EUR/USD: Lower-High or Pause in Bullish Return? Prices Currently Testing Key Resistance

Are Euro Bears Done?

Chart prepared by James Stanley

The big question at this point is whether the Euro can extend its bullish 2017 run. As we’d discussed shortly after October’s ECB rate decision, given how strong the move in EUR/USD has shown this year, the pair could technically retrace as far as 1.1200 while the longer-term bullish trend remained intact. We didn’t get down there, nor did we even test the 38.2% retracement of that move at 1.1423.

EUR/USD Weekly: Bullish Continuation Targets Confluent Area 1.2134-1.2166

Are Euro Bears Done?

Chart prepared by James Stanley

With prices now testing the prior batch of swing-highs that runs from 1.1837-1.1880, the prospect of bullish continuation appears to be growing more likely. If we do take-out this zone of resistance, the psychological level at 1.2000 is exposed and if we’re able to take-that out, the Fibonacci level at 1.2134 becomes attractive for top-side as we move towards year-end.

Euro, Non-U.S. Dollar

Handling EUR/USD at the moment can be challenging as we’re seeing two different majors markets going through some process of change. While this can be exciting for raw movement on a chart, it can be considerably less so in assimilating probabilities around positions. Rather than play two games at once, traders can attempt to isolate the Euro to more strategically focus on topside in the pair.

As in, why buy the Euro against a U.S. Dollar that may or may not be in the process of its own bullish run? Why not, instead, look to the Yen, or the Australian Dollar for such a play? This can be done in a variety of ways, and utilizing a cross-pair is certainly one of them.

EUR/AUD was our ‘top 2017 setup’ in our annual write-ups, and this was taken from a few different areas, primarily fundamental as driven by the expectation for the ECB to get ‘less loose’ this year. Meanwhile, Australia is nowhere near rate hikes, and the RBA would probably like to cut if they could; but likely won’t out of fear of putting even more air into the situation around real estate prices there. This could make the Australian Dollar as an attractive candidate of weakness for position trades, and this can open the door to a pair like EUR/AUD for such a theme. We’re currently up over +1,200 from our entry level almost year ago, and there are two targets left on the topside of the move. If you’d like to access this report as part of our DailyFX Trading Guides, please click here.

EUR/AUD Daily: 2017 Trend Change as Bulls Take-Over, Drive to Fresh Yearly Highs

Are Euro Bears Done?

Chart prepared by James Stanley

Also an option for the long side of the Euro is EUR/JPY. Just last week it appeared as though the bullish trend in EUR/JPY might be on the verge of turning-over. But, less than a week later that prior bearish theme appears outdated, and bulls can come back to the pair with continuation approaches. The big point of reference in the pair currently exists around 134.41. This is the 61.8% retracement of the 2014-2016 major move, and this level has twice helped to hold the highs in EUR/JPY over the past couple of months. This can be an ideal area to investigate for profit targets, while also furnishing a resistance level that could be used for bullish breakout approaches.

EUR/JPY Daily: The Trend That Doesn’t Want to End, Support Holds, Double-Top Exposed at 134.41

Are Euro Bears Done?

Chart prepared by James Stanley

— Written by James Stanley, Strategist for DailyFX.com

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