A rally in the Euro since last week is seeing the EURUSD potential to breakout higher. The new trading week has begun with a more cautious tone at the critical resistance zone. We continue to think the FX market continues to calibrate the Euro Zone’s rebounding story.
The heavy data releases still on tap for this week, but the data releases due on Friday. Until such time, either range trading or trading with the USD movements could be possible. We would be concerned if EURUSD does not push and hold above 1.2250 by the end of this week. Renewed COVID fears and surging inflation are the two key factors keeping traders on edge.
Bearish USD theme supporting the EUR
EURUSD has been stuck in a narrow range, and this week is also unlikely to feature any significant triggers. The Euro area Flash PMIs for services and manufacturing are slated for release this Friday, but inflation figures and new policy tone is being watched more closely than PMI figures. Hence, we expect consolidation to remain in place in the week ahead. It could change the tone if 1.2250 is broken decisively.
FX positioning: Here is the gist of USD positioning
Data review:
April ECB policy meeting minutes were released last Friday. The minutes clearly indicated that the “June” ECB meeting would provide the next opportunity to conduct a thorough assessment of financing conditions and the inflation outlook, at which time the assessment would be informed by the new Euro system staff macroeconomic projections.
Most of the analysts expect a reduction of the Pandemic emergency purchase program (PEPP) is the next direction for the EUR.
Looking ahead, Euro area Flash PMIs are slated for release this Friday.
TECHNICAL OVERVIEW
Yields stuck to a light range, whereas bunds continue to rally.
With the current trading height, the price action approaching its strong resistance zone spread between 1.2200- 1.2250, which remains a key level to watch for. The higher low and higher high patterns are clearly evident on the daily and weekly charts. A decisive breakout above 1.2250 on a closing basis may cause strength towards the early Jan 2021 high and 1.2450 as per the A-B-C weekly pattern.
What if 10-year yields creep higher beyond 2.00%? Support exists at 1.2250 and 1.1950. A breakdown below 1.1950(weekly closing) would mark the first lower high pattern (weekly) since Mach 2020 lows. In this case, 1.1500 would be the next destination, followed by 1.1200 as per the weekly A-B-C bearish pattern. In the light of the latest US April inflation hot number, we remain sideways for a better trade opportunity.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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