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Andreas Zanin
Analysis | November 9, 2020

FX Outlook: Analysis EUR/USD & EUR/JPY

USD Index Tests Key Level After Election – EUR/USD Moves up to Key Level

09/11

“U.S. stock index futures pointed to a sharply higher open on Monday after President-elect Joe Biden was declared the winner in a highly contentious election.” (Reuters) Donald Trump of course is not conceding the election and legal battles will now start.

The DXY (which measures the USD against a basket of currencies) on the chart enclosed is testing the bottom of the recent channel but volatility is low and we are looking for a short-covering rally. On the chart enclosed speculators on the CFTC Net Traders Positions still remain heavily short. The USD is pricing in already Biden’s win in the election, in addition we have a contested election with all the uncertainty that brings. Furthermore, with COVID cases surging in the US and Europe we would expect the USD to rally as traders become more cautious.

If we look at USD pairs today the volatility is low and we are at key levels in many pairs USD/CAD testing 1.300, USD/CHF at 0.9000, etc. EUR/USD is also testing the big 1.1900 level and is trying to break out of its recent range.

Euro – No V-Shaped Economic Recovery and a 2 Year Extreme in Terms of Short Positions

In terms of euro zone the market has the view that the economy will recover next year to pre-pandemic levels but this is priced in and unlikely to happen. CITI bank is against the majority view in terms of a v Shaped recovery in the Euro zone economy they note – The new lockdowns in Europe may bring the pandemic under control but they may go on for longer or escalate:

“A vaccine or other cure that could permanently control the pandemic is possible, but this could take years, widening the range of possible economic paths further. Huge losses can snowball – Our illustrative scenarios suggest GDP might still be more than 10% below 2019 levels in two years’ time. Cumulative losses over this period could be 14-33% of 2019 GDP for the Eurozone Impaired public and private balance sheets could snowball beyond the pandemic”(CITIBANK)

Goldman Sachs economic projections are gloomy as well (see chart at the end of this article) More stimulus will be added from December which is bearish the currency and won’t help increase inflation or economic growth. We are looking for the Euro to move lower on the USD and also the JPY. The JPY is the number 1 safe haven currency but EUR rally looks a sell back to major resistance or through nearby support.

Technical Analysis

DXY USD INDEX: The USD has moved down to the key 92.00 support level and if it holds we would expect a move up recent highs and possibly onto the 96.00 level – The bearish news is priced in, speculators are heavily short which points to a short covering rally.

EUR/USD Daily Chart: We have traded in a channel since August and we are now stalling into resistance at 1.1900. If we break below today’s low we would expect a return to the bottom of the channel at 1.1600. Any Breakout above resistance we would look to sell on weakness. If we were to break lower and take out the 1.1600 we would expect a major trend reversal as the large number of speculators exit on stop.

EUR/JPY Daily Chart: We have rallied to the 20 Day MA and if a turn down through below 122.00 support is a sell in our view for a move down to 118.00 with stop protection behind the 124.00 round number. If we continue to strengthen and test 124.00, we view the EUR as a sell on any weakness stop behind the double trend line resistance behind the 125.00 level for a move down 122.00 then 118.00

 

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