KTM FX Weekly: Mirror image theory supports 1.2500+ into 2021

• As the year draws to a close, it is timely to acknowledge what a unique year it has been for us. A global pandemic, worldwide recession, the fastest bear market, and the quickest bull market in history are the key themes so far this year. Looking ahead into the new year 2021, we are hopeful the coming months will be less surprising, although there are still plenty of important themes investors need to consider.
• With the latest vaccine announcements, the global growth story has changed its course. Besides, the US will be under new leadership, which leads to new trade relationships across the globe. Both of these factors are positive for investors. At the same time, China is leading the Global recovery race.
• The latest Chinese data suggest the recovery in China has been more robust than the rest of the world. On Monday, China reported its enormous trade surplus for November. It hit a record of +$75.4 bln, compared with a $58.4 bln in October, and analysts have expected a +$53.5 bln surpluses. Their exports were up an impressive +21% in November compared with the same month a year ago, and their imports were up +4.5%.

FX

All the above three factors support the higher EUR. Since March lows, the EURUSD has been enjoying the bull ride, rising nearly 15% to 1.2100 and 8% higher than where it began the year. The top performers in the EUR cross this year are EURGBP with 7% and EURCADwith  6.50%. This is the strongest rally since 2011—however, EURCHF has been our favorite bullish cross, down 0.60%.

 Positioning: In its latest IMM positioning report, Danske bank said, “Leveraged funds flip positive on EURUSD.”

Macros

Data-wise, inflation dropped to negative territory in Germany and remained negative for the EA. November EA inflation figure remained negative for the fourth consecutive month. Even though the November CPI figure slips lower, we expect future recovery remain intact with the latest vaccine announcements.

Turning to PMIs, EZ Manufacturing PMI growth remains robust in November, as per IHS Markit. The official pre-released stated that for the fifth successive month, an increase in manufacturing production was recorded.

Commenting on the final Manufacturing PMI data, Chris Williamson, Chief Business Economist at HIS Markit said, “Eurozone manufacturing output continued to grow at a decent pace in November. Although the rate of expansion cooled from October’s 32-month high amid new lockdown measures, the sustained expansion should help to soften the economic blow of COVID-19 restrictions, which have hit the service sector hard”.

• The Federal Statistical Office (Destatis) reported that consumer prices are expected to decline by 0.8% in October 2020.
• Euro area annual inflation is expected to be -0.3% in November 2020, stable compared to October according to a flash estimate from Eurostat, the European Union’s statistical office.
• Final Eurozone Manufacturing PMI at 53.8 in November (Flash: 53.6, October Final: 54.8).

• Final Eurozone Services PMI at 41.7 in November (Flash: 41.3, October Final: 46.9).
• EZ Sentix investor confidence rose from -10 to -2.7. The latest figure was better than expected.

Looking ahead, we will see GDP for EA, and ECB policy decision.

Danske Banks’s preview: On Thursday, the ECB is widely expected to announce a recalibration of its monetary policy instruments and the uncertainty is what tools it will use. Recent comments have focused on more Pandemic Emergency Purchase Programme (PEPP) and targeted longer-term refinancing operations (TLTROs) as the main tools but we expect the ECB to tweak its more technical parameters, such as tiering and collateral rules, as well. We do not expect a material immediate market reaction to the recalibration.

 TECHNICAL OVERVIEW

The EURUSD had a solid week, rising 2% to 1.2175 levels. This was the most substantial weekly gain since early November, and it seems the EUR 1.50% above from the recent peak in August 2020.

On the weekly chart, the price action printed a higher low pattern for the first time since November 2017. And the same chart is hinting two bullish signs.

1. EUR falls 0.30% to the end of November but posted a substantial gain of 2.40%. If we look back to history, only five times the EURUSD posted strong gains mover 2% since 1996. This November 2020 move is resembling 2000 and 2017 moves. On both the occasions, the following month was produced a massive green candle.
2. The weekly higher low pattern is a mirror image of the 2017 rally (see below). The final wave higher could extend towards and beyond 1.25 levels.

Coming back to the weekly trend, the price ran through the target we set week. Now, as long as 1.1600 is valid, we expect more headroom in the medium term.

Support exists at 1.2000, 1.1810, and 1.1600. Resistance located at 1.2200 its 80.0 fib reaction. A daily close above would mark a new high towards 1.2340 and 1.2400 levels.

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

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