EURUSD about to see a deeper correction due to a USD reversal?

Avgust 21, 2020 14:00

Source: Economic Events August 21, 2020 - Admiral Markets' Forex Calendar

Instead of our preferred deeper short-term correction towards 1.1400/30, which would have delivered a trading setup with a more attractive risk-reward ratio, considering our midterm expectation of the EURUSD going back above 1.2000 based on our last research article for the EURUSD, the currency pair instead pushed to substantially above 1.1900 before the FED Minutes on Wednesday.

That push was then followed by a sharper drop back towards 1.1800. What happened?

We are still bullish on the EURUSD. However, the short-term mode seemed a little extended on the upside with non-commercials having built their biggest net-long position in Euro Futures since 2018.

Secondly, it also became clear that the recent USD weakness was likely driven by market participants anticipating a "rate cap" from the FED sooner rather than later. This expectation proved to be inaccurate, at least in the short-term, with some FOMC members expressing concerns about such yield curve control, as it could result in excessive balance sheet growth.

So, the latest economic data from the US significantly surprised on the upside with the Citi Economic Surprise Index pushing from one All Time high to another in recent weeks and months, indicating that 10-year US yields are simply too low from a pure global macro perspective. A strong move higher could be imminent, in which case the US central bank would have to act, since such a move and potential rotation from growth stocks back into value stocks would result in elevated volatility in Equities, something the FED likely will not let happen in the current, very fragile market environment.

That said, any solid US economic data could result in further USD momentum, leaving EURUSD in its extended mode, vulnerable to a sharper correction back below 1.1800 in the near-term, i.e. today's Markit PMI's surprise again on the upside.

Technically, EURUSD remains bullish above 1.1700. A drop and daily close below would interrupt the bullish sequence on D1, neutralizing the bullish picture in the short-term:

Source: Admiral Markets MT5 with MT5SE Add-on EURUSD Daily chart (between May 13, 2019, to August 20, 2020). Accessed: August 20, 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 dropped 4.4%, and in 2019 it fell by 2.2%, meaning that after five years, it was down by 7.3%.

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