EUR Longs: Time To Take Profit

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Includes: DRR, ERO, EUFX, EUO, FXE, ULE, URR
by: Max Loh

Summary

The EUR has rallied strongly against a host of other currencies, especially the USD, since the start of the year.

Two upcoming catalysts threaten to derail EUR strength - ECB officials are uncomfortable with the EUR trading at elevated levels, and German elections loom around the corner in September.

EUR longs should consider taking profit at current levels; as EURUSD has broken out of its trading range set since 2015, look to re-enter longs at 1.1450 support levels.

The Euro has been one of the better performing currencies; against the USD, it has rallied from 1.0400 levels in December 2016 all the way to current levels of 1.1750, breaking out of the range price action has been bound in since 2015, with the upper bound of the range around 1.1700, as seen from the chart below.

From here, there are two catalysts which I believe could reverse the strength of the EUR, and I advise EUR longs to consider taking profit at current levels. The first catalyst is the set of minutes released last week by the European Central Bank (ECB) for its most recent meeting in July, where central bank officials expressed concern over the strength in the EUR. A stronger currency would hamper the ECB's target to bring inflation levels to just under 2%, as it would lead to cheaper imports and weigh on export growth.

The ECB had previously stated it might consider discussing reducing the pace of its bond purchases in its September policy meeting, and its recent dovish comments in the minutes threaten to add uncertainty to this plan. Reducing the pace of bond purchases would give the EUR further strength in theory, and there is a chance the ECB will pour cold water on this plan come September should the EUR remain at elevated levels.

Next week investors will look towards the Jackson Hole meeting to take place from 24 to 26 August for any information or clues from Mario Draghi on the ECB's policy plans going forward, and the stage might be set for Draghi to deliver some dovish soundbytes in line with fellow ECB officials as seen during the ECB minutes.

The second catalyst that could send the EUR lower would be German elections, slated to take place in September. In the ECB minutes, central bank officials stated that the EUR's rise could be attributed to the removal of political uncertainty, with Macron winning French elections. With German elections upcoming in a month's time, surely this event would re-introduce political risk and uncertainty to the EUR.

In a recent ARD television survey, German voters rated social inequality as second only to the country's refugee policies among the country's biggest problems. As seen from the Financial Times excerpt below, the poverty rate in Germany, as described as the percentage living in households with a income below 60% of the national average, is climbing - this, despite a declining unemployment rate. Social inequality appears to be a pertinent issue in Germany, which make for an uncertain election for the incumbent party led by Merkel.

In conclusion, the EUR has enjoyed a very powerful run up since the start of the year, especially against the USD. However, the European Central Bank is starting to get wary of the currency strength, and German elections loom around the corner, threatening to add uncertainty to the currency. All this might lead to a decline in the EURUSD from current 1.1750 levels, back to support levels around 1.1450.

I reiterate my stance to take profit on EUR longs at current levels. As EURUSD has broken out from its trading range set since 2015, as mentioned earlier, I feel this currency pair still has legs to go higher - just not from current levels. I would suggest re-entering EUR longs around 1.1450 support levels, targeting the 1.2000 psychological level and with a stop loss just below 1.1100.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.