Trading Lessons: Trading Big Trends EUR/USD
We have been bearish of EUR/USD all year and it has seen a big sell-off of over 500 pips but there is far more downside to come in our view. Our view of the fundamentals, sentiment, and technicals below which points to continued weakness in EUR/USD…
Below is a chart we posted at the turn of the year which comes from Citi bank and shows how bullish the market was of the Euro in terms of speculative fund positioning. Every time in the past when speculators held such a big long position the euro fell hard and the moves were over 1000 pips. The euro has fallen roughly 500 pips from the start of the year and we think there is more to come:
How Bullish of the Euro are Speculators at Present?
While we have seen some short-covering the market still remains very short of the USD generally and the big speculative fund positioning is long the USD. On the chart below we can see that speculators are covering shorts but we would expect more to come out and the 3 key groups below to all go long the USD and short the EUR which means more downside in the USD.
US Yields and Economy to Outperform Euro Zone
In terms of the USD, it has better bond yields than euro zone which we can see on the chart below and the gap will widen in our view. Also, the economy is doing better than other G9 nations and expectations are high for strong growth going forward with the new 1.9 trillion stimulus package. In terms of euro zone the gap will widen going forward as euro zone struggles to vaccinate its population.
Why Are Speculators Bullish of the EUR?
The original big speculative long position was built upon the view the EU economy would outperform the US but this logic doesn’t add up now also the market viewed the Fed’s huge stimulus as bearish for the USD but despite it, bond yields have moved up and will move up further. Also, the ECB is now doing more stimulus relative to GDP than the US which will weigh on the Euro. We think speculators will exit euro longs and go short which means there is much more downside in the Euro.
Technical Analysis EUR/USD
On the Weekly chart we can see the big picture we have resistance at 1.1900 and our downside targets are 1.1600 which is a level calculated from speculative longs being washed out and then a move down to 1.100 to reflect the bearish fundamentals and “fair value” in our view for euro.
In terms of the daily chart the euro is a little oversold in the short term but is a sell back to resistance levels indicated with stop protection behind the big weekly and daily resistance level of 1.1900.
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