On Monday the 23rd of April, trading on the US dollar closed up. After weak manufacturing data from the Eurozone, as well as a rise in US10Y bond yields providing support to the dollar, the single currency dropped from 1.2289 to 1.2185.
In addition to being bolstered by the debt market, the dollar also got a boost during the US session from favourable PMI and existing home sales data, both of which exceeded market expectations. The dollar went on the attack on all fronts, with declining euro crosses further piling pressure on our main pair.
Day’s news (GMT 3):
- 09:00 Switzerland: imports (Mar), exports (Mar).
- 11:00 Germany: IFO – business climate (Apr), IFO – current assessment (Apr), IFO – expectations (Apr).
- 11:30 UK: public sector net borrowing (Mar).
- 13:00 UK: CBI industrial trend survey – orders (Apr).
- 16:00 Belgium: leading indicator (Apr).
- 16:00 USA: housing price index (Feb).
- 17:00 USA: Richmond Fed manufacturing index (Apr), new home sales (Mar).
Fig 1. EURUSD hourly chart. Source: TradingView
The reversal zone between the 112th and 135th degrees failed to contain the decline. This morning’s rise on US10Y bond yields has left an impression across all markets. As bond yields approach the psychological barrier of 3%, investor interest in the debt market has picked up, since fast growth for bond yields tends to have a negative effect on the stock market. Moreover, a mass retreat from stocks will have a ripple effect on other markets.
On the daily timeframe, the trend line and the lower boundary of the triangular formation has been broken. As such, I think it’s pointless to look at long positions for now.
Since trading got underway in Asia, market participants have started recovering from yesterday’s drop to 1.2185 that occurred as a result of developments in the US. The rate has since jumped 39 pips to reach 1.2224.
Nothing has changed on the cycles. I’m expecting a new wave of sales after the next pullback, although I’m not sure what this pullback will look like. After three days of decline and 215 pips shed, I don’t want to sell. If you do sell, there is a small upside in that there will be an upwards correction to follow, but I don’t want to get into that sort of situation.
The stochastic oscillator is now in the sell zone and the trend on the hourly timeframe is bearish. Most of the euro crosses are trading up, so I’m expecting the euro to drop no further than 1.22. My forecast has the euro then recovering to the 45th degree at 1.2239. The day closing above 1.2250 will give confirmation of a false breakout of the triangular formation and of a reversal candlestick.
Perhaps the classic scenario will confirm the veracity of the breakout: breakout of the trend line, rebound below the line (1.2290). There’s a support at 180 degrees (1.2178).
Could the euro drop below the Asian minimum? It’s perfectly possible given that the trend line has been broken through and the ECB has a meeting on Thursday. It’s really a question of which way the media will sway markets ahead of Mario Draghi’s speech.