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Andreas Zanin
Analysis | February 2, 2021

KTM FX Weekly: H&S pattern suggest 1.2000 is coming

  • Dollar cheers to starts the week
  • EUR trading at year-to-date lows

The common currency ended with steep losses on Monday, extending losses for the second straight week. Barring other European currencies, Swiss Franck and Swedish Krona, G10 currencies outperformed against the EUR.

In the foreign exchange market, the EUR edged lower against the dollar in January and extended weakness in early February.

As shown in the above chart, EUR was underperformed against the G10 currencies in January, except JPY. Besides the dollar index, counties bid well and managed to close above the 50MA for the 1st time since November 2020, and the price action breached the 10-month descending trendline. A classic H&S pattern on the dollar index daily chart suggests EUR could continue to lose its height in the coming days. On Tuesday Asia session, EURUSD holds 1.2050 levels, its year-to-date lows. Westpac says, “Concerns over the slow vaccine roll-out in Europe” weigh on market sentiment towards the EUR. 

Market attention is starting to refocus on other themes, including US fiscal stimulus, vaccine roll-out. A short while ago, President Biden and VP Harris met with a group of 10 centrist Republican senators to discuss the latter’s $600b fiscal stimulus counterproposal.

Numbers to watch:

The UST 10yr yield was a little down to 1.09% vs. 1.11 Friday’s closing level. Besides, Bund 10-yr closed at -0.51%. Since November, the bunds have been trading between 0.50-0.70%.

In its latest World Economic Outlook, the IMF now expects the global economy to expand 5.5% this year, a small upgrade from October’s forecast. Whereas the fund downgrade for the EA region by 1.0% percent to 4.2% in 2021. According to the projection table, Germany, France, Italy, and Spain, the EZ’s four largest economies, saw their growth estimates cut for 2021. Italy and Spain were downgraded by -2.2% and -1.3% compared to the IMF’s October projections. 

 

According to the latest PMI data, macros: Eurozone manufacturing conditions continued to recover in the opening month of 2021. Business conditions have now improved for seven months in a row, despite many countries facing COVID-19 restrictions.

 

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. January’s figure was amongst the highest seen over the past two-and-a-half years. 

In December, German retail sales were a shocker, falling almost 10% on the month as the country went back into lockdown.

The upcoming data calendar is unexciting. We will get EZ Services PMI and Flash CPI estimate. 

 

TECHNICAL OVERVIEW

Closed below the 50MAand, the 20MA has been capping the price. 

Finally, as we expected last week, the price action developed a classic H&S pattern but still holding the neckline at 1.2050. A decisive break down below this could further decelerate the near-term trend to 1.2000-1.1970 its 100MA. 

For all the longs, 1.1900/1.1880 is the stop loss. If the price is moving higher, the key resistance levels to watch out are 1.2215 and 1.2285. The corrective A-B-C pattern suggests 1.2000 is pivotal. A move below 1.2000 could confirm the reversal pattern, which is likely to trigger more weakness in the short term. 

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

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