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Andreas Zanin
Analysis | February 9, 2021

KTM FX Weekly: Four days down last week, what should traders do this week?

The common currency in the G10 currency market has declined nearly 3.25%% since January 01, 2020, with the EUR falling 1% during the week ended February 06.

On February 08, EUR gained a tad to quote 1.2050 against the dollar as the dollar index failed at the 100MA after a decent rally produced from early January 2021 low. Since February 01, the cross has lost nearly 100 pips and topped 1.2350 on January 06, 2021, in line with the rise in the G10 currencies.

 Numbers to watch:

Traders may need to see where the US 10yields is marching. This year, the US 10yr yields were rejected five times at 1.15% and rejected twice at 1.19%. A decisive breakout above 1.19% could push the yields further North towards 1.25% before it reaches 1.30% and 1.50%. Overall, 1.15-1.19% is the level we watch closely in Q1 2021.

Damien McColough, Head of Rates Strategy at Westpac, said, “We expect 10yr yields to challenge the 1.2% level in coming days, but note that an extended run higher from here would imply the market feels that policymakers will have to curb inflation quicker than they are currently expecting.”

On Monday, Germany’s benchmark 10-year Bund yield closed at -0.44%, up 0.006 bps from last Friday, and Italian bonds continue to rally with the 10yr BTP yield -2.5bps to 0.51%.

Overall, we find US yields will outperform Europe in the months ahead. Based on this, we expect EURUSD will trade ranges and should approach with a sell-on rally theme for the time being.

 Macros:

Firstly, in EA December, Germany’s Industrial Production stagnates in the previous month, according to the official release of the Federal Statistical Office (Destatis), and EZ sentix economic index declined by -1.5 points.

  • In December 2020, production in the industry remained unchanged on the previous month on a price, according to provisional data of the Federal Statistical Office (Destatis).
  • The sentix economic index for the eurozone declined by -1.5 points in February to an index level of -0.2 points, according to sentix.
  • Final Eurozone Manufacturing PMI rose to 54.8 in January, down slightly on December’s 55.2 and little-changed on the earlier flash reading.
  • German retail sales were a shocker, falling almost 10% on the month as the country went back into lockdown.
  • Euro area annual inflation is expected to be 0.9% in January 2021, up from -0.3% in December, according to a flash estimate from Eurostat, the statistical office of the European Union.
  • The Markit EZ services PMI fell further below the 50.0 no-change marks in January, slipping to 45.4 from December’s 46.4. As per the official release, the latest data marked the fifth successive month in which the index has posted a reading below the 50.0 no-change marks.

TECHNICAL OVERVIEW

As expected, the price briefly fell below the 1.20 handle, but the 100MA came to rescue the EUR bulls. Since last November, twice the 100MA offered decent support on the daily chart. The entire bullish view negates on breaching of crucial support, but daily indicators RSI and oscillator are offering some hope.

RSI stands for Relative Strength Index. It is a significant indicator used to identify trend reversal. There are a lot of trading strategies using RSI; here, we use RSI with RVI, which stands for Relative Vigor Index. The combination of these bullish indicators is often considered as a trend reversal.

During the last few trading sessions, RSI retraces back to 33, which is an oversold territory. This behavior suggests RSI could turn its tail North. Currently, EURUSD is going through this setup, and we expect higher price momentum towards 1.2100 and 1.2150. The entire bullish view negates on breaching of crucial support.

In line with the indicators, the hour chart is developing an inverse head and shoulder pattern. Interestingly the price breached the neckline but couldn’t hold the gains. Shoulders spread between 1.2015-1.2000. As long this is support, watch out for 1.2100 and 1.2150. Traders do remember that at bigger time frames, we are still trading in a larger descending channel. This current bullish view is based on the hourly pattern. So, this is just a minor bounce in a large bearish channel. A decisive breakout above 1.2200 means a complete reversal towards 1.2350 and 1.2500.

 

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

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