- EUR/USD charts flag scope for recovery to 1.1746

- After downtrend momentum ebbs ahead of 1.1500

- Market still bearish on EUR, bullish on USD outlook

- Stretched positions & profit-taking driving rebound

Image © European Central Bank

Spot Market Rate at Publication:

EUR/USD: 1.1650

The Euro-Dollar downtrend lost momentum through the opening weeks of October and the single currency has since reversed higher from lows near to 1.15, although technical analysts at Commerzbank say the rebound could lift the Euro close to 1.1750 over the coming days.

Euro-Dollar entered the week with 1.1600 appearing to bar its path higher in the same manner as it had done throughout the prior week, although the greenback was quick to give way in Monday trading and the ensuing price action had lifted EUR/USD above 1.1650 by Tuesday.

The rebound follows another instance of ‘bullish divergence’ on the charts last week when the Euro set a new low for the year at 1.1525 that was accompanied by a rising relative strength index (RSI) measure of momentum, which can indicate that a trend change is in the pipeline.

The Commerzbank team cited this as one factor influencing a decision last week to buy EUR/USD around 1.1540 last week, although they advocated this week that clients exit wagers on the single currency at 1.1720 or otherwise before.

“EUR/USD has broken higher through the accelerated downtrend as suspected. The intraday Elliott wave counts remain positive and we would allow for a deeper retracement to 1.1746,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: Commerzbank chart shows EUR/USD with technical indicators and analysis.

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Jones and colleagues said Tuesday that Euro-Dollar could now benefit from technical support around 1.1565 and also noted that should the single currency stage a recovery above 1.1746 then would likely clear the way for a further advance up toward 1.19.

“The market is still long USDs and is in some pain,” writes a London based trader at J.P. Morgan, in a Tuesday morning summary of the desk’s views.

“Euro is relatively well behaved to this point given the weight of EURXXX short positioning. 1.17 needs to hold above in EURUSD for that to remain the case as the 1.16 handle is a busy lane of traffic and an important pivot zone for the medium term picture,” the note reads.

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While the 10-month downtrend in EUR/USD had slowed noticeably through October, it wasn’t until last Friday’s sell-off in Dollar exchange rates that the Euro was able to stage an attempted recovery, while both sets of price action have extended into the new week.

“Underwhelming manufacturing data yesterday in the US and decline in capacity use to a post-crisis low underlines the message that supply constraints are hobbling industrial activity, also in the US,” says Kenneth Broux, a strategist at Societe Generale.

“This does not mean the Fed will change course on tapering but it is something the front-end of the US curve cannot ignore. Pricing nearly a 70% chance of a first rate increase in June 2022 is pushing it and exposes the dollar to profit taking,” Broux wrote in a Tuesday note.

Above: Euro-Dollar shown at daily intervals with major moving-averages and Fibonacci retracements indicating possible areas of technical resistance.

The Dollar saw heavy losses against all major currencies as the Euro-Dollar rate rebounded over Friday, Monday and Tuesday, while many analysts have attributed this to profit-taking by investors who’d been betting the Federal Reserve (Fed) would raise its interest rate sooner than previously guided for.

“USD bulls have been encouraged by the debate about a possible increase in the Fed funds rate as soon as the middle of next year and by the push higher in US yields into what is expected to be a year-end taper announcement from the Fed,” says Jane Foley, head of FX strategy at Rabobank.

“The dovish position of the ECB has been a factor undermining the single currency particularly in the wake of the more hawkish positions of the Fed and the BoE,” Foley wrote in a Monday review of the latest Chicago Futures Trading Commission data on the Commitments of Traders.

For its part, the Euro has had little going for it given European Central Bank (ECB) guidance suggests it will be years before Eurozone interest rates rise.

Meanwhile, many economists also suspect the ECB could eventually preserve part of its pandemic era quantitative easing programme for a lengthy period beyond the point when others elsewhere have fully wound theirs down and begun to raise interest rates.

“Next week's ECB meeting is largely a prelude to the December meeting, where new staff projections will base the foundation for the exact calibration of its instruments. We expect ECB to flag risks to the outlook and as such not deviate from the current baseline and send new policy signals already but wait for a new projections round in December,” says Piet Haines Christiansen, chief analyst for ECB and bond market research at Danske Bank.