Why the EURUSD pullback has further to go

The main point of interest in FX markets overnight was a second day of gains for the U.S. dollar index, driven principally by a move in the EURUSD which closed -1.30% below its 1.2011 recent high.

FOREX 4

The main point of interest in FX markets overnight was a second day of gains for the U.S. dollar index, driven principally by a move in the EURUSD which closed -1.30% below its 1.2011 recent high.

After maintaining a bullish view of the EURUSD since May, last week the reasons why the EURUSD was setting up for a corrective pullback were outlined here.

As readers may recall, the view for a pullback was based on technical analysis (more on this later) as well as an acceleration in new coronavirus cases in Europe, in comparison to falling new cases fell in the U.S.

It was also based on a run of economic data that indicates the U.S economy will enjoy a speedier coronavirus recovery, than Europe. Further accentuated this week by the release of a stronger than expected U.S manufacturing PMI at 56 verse the Eurozone manufacturing PMI at a barely expansionary reading of 51.7.

Also playing a part in the EURUSD’s pullback, a comment on Tuesday night from ECB Chief Economist Lane noting that while the ECB does not target FX rates the “euro dollar rate matters.”

The timing of Lanes comment coincided with the EURUSD hitting the significant 1.2000 level. Both factors were highlighted in our interview on Ausbiz TV yesterday here. (You will need to sign up to Ausbiz TV to hear the interview - it is free to do so.)

If an additional reason was needed, IMM positioning data showed that speculative accounts added another 15k long EURUSD contracts last week, taking the total to an unprecedented 212k long contracts.

Returning to the technical setup. After the formation of a textbook daily bearish reversal candle on Wednesday from trendline resistance and from the key 1.2000/1.2050 resistance zone, the EURUSD commenced a pullback.  The pullback has scope to extend towards uptrend support and recent lows 1.1720 area, which will be looked at as a possible buying opportunity, should prices stabilise in this area.

In the meantime, bounces back towards 1.1950/70 are likely to attract sellers and this will remain the case providing the EURUSD does not see a sustained break above 1.2050.

Why the EURUSD pullback has further to go

Source Tradingview. The figures stated areas of the 3rd of September 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.