In previous posts, we have looked at EUR/USD and EUR/GBP and remain bearish of both. In terms of EUR/USD, we have seen some weakness from the highs this year but we have bounced back to nearby resistance and view the EUR as a sell on weakness. EUR/GBP has fallen hard and while we are oversold in the short term we see any bounce as a selling opportunity.
Fundamentals and Sentiment
In terms of the USD, speculators hold their biggest short position since 2011 and this points to a major move to the upside in our view. In terms of big fund money, it’s heavily long the Euro. The speculative position was built up on the view the Fed will keep rates low for the foreseeable future but bond yields are on the rise pointing to higher interest rates ahead. We have looked at bond yields and their importance in previous posts and if yields continue to rise we expect this strength to support the USD generally and particularly against the EUR where yields and interest rates are negative.
Speculators also bought the euro on the outlook for the economy in the EU which they believe would outperform the US going forward but economic data is far better out of the US than the EU and the impact of lockdowns is less in the US which will see the gap between the economies widen further in favor of the US.
In terms of the GBP while the economy has been hit hard by lockdowns (just like the EU) The UK is leading the major countries of the world in terms of vaccinations and we expect the UK Economy to recover strongly in the second quarter. Also central bank stimulus will come down in the UK in the coming months but looks likely to be expanded in the EU. Finally, the UK was sold off hard on Brexit worries for years against all major currencies but with a deal done the GBP is now correcting its historically oversold condition.
On the chart below we saw the euro fall back from above the 1.2300 level to below 1.200 but we have rallied back to the key 1.2200 level. We view this level as firm resistance on a close basis and around this level we have big institutional hedging sell orders. If the 1.2200 level holds and we move down to break the next round number which is 1.2100, we would expect volatility to pick up to the downside. Our downside targets are derived from the size of the speculative position which is similar to 2011 points to a major move to the downside as speculators are taken out on stop.
In terms of the potential downside in the EUR the monthly chart below gives us targets of 0.8300 then 0.8000 with any rallies likely to be held by first level resistance. In terms of getting into the trend the daily chart gives us 0.8700 as first level resistance and then we have the 20 day MA (green line) at 0.8750. In 2021 so far the EUR has remained below the average and we view any bounces to resistance as long term selling opportunities.
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