EUR/USD Continues To Show Impressive Strength, Higher Targets Still In Focus

Includes: FXE, UDN, UUP
by: FXstreet

The EUR/USD continued to add to its recent gains, climbing another 23 pips to finish at 1.3335. It was a fairly volatile day, with the pair trading as low as 1.3265 early in the New York session before finding firm bids and climbing higher later in the day.

Jane Foley, Senior Currency Strategist at Rabobank, discussed her thoughts on what is driving the recent move higher. In a week that so far has seen little economic data released from both the U.S. and EU, she noted the majority of the gains were likely due to position unwinding. "The bigger surprise is the strong standing of the EUR and the fact that the USD is one of the poorer performing currencies over the past month. We attribute much of the USD's lackluster performance in recent weeks to positioning. Earlier this year the market built long USD positions on the back of good Q1 US economic data. Q2 US economic data is softer and this appears to be limiting investor's desire to lengthen USD positions despite the greenback safe haven status," Foley commented.

Foley went on to point out in recent weeks sovereign bond yields have started to tick higher in Europe, a development she finds concerning. "Peripheral bond yields have risen since their lows at the start of May. Yields will remain a key barometer of investor confidence in EMU," Foley added. To conclude her view, Foley went on to say she still thinks on a 3 month time horizon, there is a strong chance of seeing the EUR/USD trade back toward the 1.2800 level

Although there were no major economic reports scheduled, the Economic Research Department at BNP Paribas pointed out that EU Industrial Production was released and the print did come in better than expected. "Industrial production rose by 0.4% m/m in April, up for the third month in a row. Output is still below the level recorded last year, although the gap is narrowing," BNP noted. In further discussing their views, the BNP team went on to comment, "The breakdown sent mixed signals. Production fell by more than 1% over the month in the energy sector (a downward correction was likely after that bad weather boosted activity in the sector over the winter). By contrast, capital goods production continued to gain momentum." To conclude, the BNP team noted the April rise was primarily driven by the strong performance from Germany and France.

Tim Riddel, Head of Global Markets Research at ANZ, shared some of his thoughts on the current technical picture for the pair. Riddel also commented that although the recent move higher has been impressive, the broader scope for the pair is a trading range. "The current push above 1.3250 may raise concern over an extension towards 1.3475-1.3500, but the overall pattern remains the same. A broad range is being defined with the bias being that the squeeze may falter in the 1.33s. An extension should merely define a 1.25-1.35 range. Dips below 1.3115 would signal that the range has been defined," Riddel concluded.

From a short-term term technical perspective, it should be noted that on the 1 hour chart RSI (14) has stayed within the bullish range between 40 and 80 since June 3rd. Furthermore, both momentum and trending indicators are in agreement on the longer-term time frame daily chart, which is likely helping to keep pullbacks shallow. On a final note, the ADX (7) trend indicator remains sharply upward sloping on the daily chart and is building value near the 55 level. This is the highest level the indicator has achieved since early February, displaying trend strength is still continuing to build. Initial resistance remains at the 1.3400 level (supply candles on daily chart), while first support sits at 1.3314 (the 20dma on 1 hour chart).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.