USD in a short-squeeze – EURUSD about to re-test 1.1400/1500

September 25, 2020 10:00

Source: Economic Events September 25, 2020 - Admiral Markets' Forex Calendar

The US-Dollar has seen a sharper bounce in recent days after being sold heavily over the last weeks and months.

As a result, EURUSD dropped below 1.1700 and it seems as if the currency pair could see a test of the region around 1.1400/1500 sooner rather than later. This is a potential long trigger and was one of our topics of discussion several weeks ago here.

One of the reasons we come to this conclusion that a further drop in EURUSD lies ahead of us can be found in our expectation of a larger USD short squeeze, given the recent rhetoric used from the FED.

While we still expect the FED to deliver more easing sooner rather than later, currently it seems as if the next stimulus will most likely come from another G10 central bank than the FED.

And in fact, speculations may arise that this other G10 central bank is the ECB:

  • On Wednesday, an FT article appeared with the ECB calling on Brussels to make its recovery fund permanent
  • ECB Executive Board member Yves Mersch said that the ECB must limit its emergency powers to temporary crises, else the ECB risks legal trouble if it tries to extend the "emergency powers" of its pandemic bond-buying plan to its other asset-purchase program.

While at first glance it doesn't seem as if further ECB stimulus will come, these headlines alone illustrate that talks behind the curtain are already ongoing and if the emergency becomes big enough the question becomes not "if", but "how".

This combination of fiscal and monetary stimulus in the EU in addition to our expectation of further pressure on US yields in the months ahead with the FED increasing its QE program again, leaves us with a short-term bearish expectation on EURUSD with the focus on 1.1400/1500, a region we consider attractive for mid-term long engagements and a target for the upcoming 6 – 12 months at around 1.2500:

Source: Admiral Markets MT5 with MT5SE Add-on EURUSD Daily chart (between June 19, 2019, to 24, September 2020). Accessed: September 24, 2020, at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the EURUSD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, in 2018, it fell by 4.4%, and in 2019, it fell by 2.2%, meaning that in five years, it was down by 7.3%.

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