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EURUSD: correction on the Euro underway

Previous:

The Euro/dollar pair closed Tuesday's trading down. Sellers managed to almost completely erase Monday's gains (engulfing the body of the candlestick). A rise in US bond yields in response to increased probability of the Fed tightening their monetary policy in June acted as a catalyst for the US dollar's growth.

On Tuesday, the 23rd of May, according to CME Group's FedWatch, the probability of interest rates going up in June has risen from 78.5% to 83.1%, in July from 79.5% to 84.4% and in September from 86.3% to 88.6%.

The dollar was also bolstered by the release of the proposed budget for the 2018 fiscal year as well as hearings in Congress regarding Donald Trump's Russia ties. A White House representative stated that the hearings in Congress confirm that there were no ties between Russia and Trump's election campaign. Remember that it was the threat of impeachment that caused the EUR/USD pair to surge to 1.1268.

US statistics:

The Markit manufacturing PMI from the US in May fell to 52.3 (forecast: 53.0, previous reading: 52.8). The Markit services PMI grew to 54.0 (forecast: 53.1, previous reading: 53.1).

The number of new home sales in the US in April fell to 569,000 (forecast: 610,000, previous reading revised from 621,000 to 642,000).

Market expectations:

During the US session on Tuesday, the trend line was broken through. The Euro fell to 1.1175. Sellers now need to consolidate below the 1.1161 low in order to trigger a mass closing of long positions on the Euro, which were opened from 1.0839. Clearly, the profit-taking has already begun, but the current decline isn't enough to form a trend.

There are a couple of positive signs for sellers. On the daily timeframe, a pin-bar has formed on the EUR/GBP cross. This is emitting a sell signal for the Euro, which was started in Asia as the cross fell below 0.8619 (yesterday's low). The immediate target on the cross is 0.8575. A fall for the cross means the same for our main currency pair.

Moody's rating agency has downgraded China's local and foreign currency ratings from Aa3 to A1 and changed its outlook from negative to stable. The Aussie dollar reacted negatively to this news, and is currently one of the biggest losers against the US dollar. It will likely bring some other currencies down with it.

Considering all the factors stated above, I'm going to risk saying that the Euro will fall today to 1.1136. Given that a lot of long positions have built up over the last few days, if we see some aggressive selling, we could see the Euro's decline speed up towards the D3 MA line at 1.11.

Tonight, the US Federal Reserve will publish the minutes from its last meeting.

Day's news (GMT 3):

  • 09:00 Germany: Gfk consumer confidence survey (Jun);
  • 15:45 Eurozone: ECB president Draghi's speech;
  • 16:00 USA: housing price index (Mar);
  • 17:00 Canada: BoC interest rate decision, BoB rate statement. USA: existing home sales (Apr);
  • 17:30 USA: EIA crude oil stocks change (19 May);
  • 21:00 USA: FOMC minutes.

EURUSD rate on the hourly. Source: TradingView

Intraday forecast: low: 1.1136, high: 1.1192, close: 1.1150.

During Tuesday's trading in the US session, the trend line was broken through. The Euro fell to 1.1175. The price fell below the lb balance line and the 67th degree. Considering that sellers have engulfed the body of Monday's candlestick, and that a daily pin-bar has formed on the EUR/GBP cross, I'm envisaging a further slide for the euro against the dollar to around the 112th degree at 1.1136. On the hourly timeframe, you can consider the maxima at 1.1263 and 1.1263 a double top.

If sales intensify below 1.1160, and the rate starts to fall faster than I predicted, we should try to hold on to 1.12 level. As long as the rate remains higher than Monday's low, there's a risk of it receding to the lb balance line at 1.1215.

Positives for the Euro ( ):

Fundamental:

( ) US president Donald Trump favours a weaker dollar;

( ) Political tensions in the USA;

( ) German chancellor Angela Merkel: the Euro is to weak because of the ECB's ultra-loose monetary policy;

Technical (short-term):

( ) According to data from 16/05/17,  large speculators on the Chicago exchange have increased their long positions while reducing short ones. Long positions have increased by 10,500 to 162,981 contracts. Short positions have fallen by 3,863 to 123,690 contracts. Net-long positions have risen by 14,363 to 39,291 contracts;

( ) According to myfxbook, the Short/Long ratio as of 7:08 EET is 77%/22%, lots: 24271/7204 (previous day: 26572/6321), positions: 63012/23374 (previous day: 68525/17287);

( ) German 10Y bond yields: 0.412% (up 3.77% from 23/05/17);

( ) EURGBP (W): AO, AC, CCI (20), Stochastic (5,3,3) - up;

( ) EURGBP (D): AO - up;

( ) EURUSD (M): AO, AC, CCI (20), Stochastic (5,3,3) - up;

( ) EURUSD (W): AO, AC, CCI (20), Stochastic (5,3,3) - up;

( ) EURUSD (D): AO - up;

Negatives for the Euro (-):

Fundamental:

(-) ECB head: revision of ECB's monetary policy not required at present. On the 10th of May, he added that the bank is in no hurry to raise interest rates or to halt its asset purchasing program;

(-) Small speculators have increased their long positions by 2,245 to 72,566 contracts. Short positions have fallen by 3,353 to 63,016 contracts. Net-long positions have fallen by 1,108 to 9,550 contracts;

(-) On Tuesday, the 23rd of May, according to CME Group's FedWatch, the probability of a rate hike in June has risen from 78.5% to 83.1% in July from 79.5% to 84.4% and in September from 86.3% to 88.6%;

Technical (short-term):

(-) US 10Y bond yields: 2.285% (up 2.30% from 23/05/17);

(-) EURGBP (M): AC, AO, CCI (20), Stochastic (5,3,3) - down;

(-) EURGBP (D): AC, CCI (20), Stochastic (5,3,3) - down;

(-) EURUSD (D): AC, CCI (20), Stochastic (5,3,3) - down;

Built into the price:

(-) Tension surrounding the situation with North Korea. Increased demand for safe haven assets;

(-) The US Congress has approved a temporary budget, avoiding a government shutdown for the time being. A week's delay will give time for knocking out a draft budget for the rest of the fiscal year (end of September). It became clear on the 1st of May that Republicans and Democrats had settled on a compromise to keep the budget going until the 30th of September;

( ) Emmanuel Macron has been sworn in as the new president of France;

( ) S&P has reaffirmed Germany's credit rating at AAA/A-1 with a stable outlook.



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