EURUSD - Ready To Pull Back?

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Includes: DRR, ERO, EUFX, EUO, FXE, UDN, ULE, URR, USDU, UUP
by: Dmitry Lifatov

Summary

With a 130-day-long run-time and an 11% exchange rate increase since April 24, 2017, EURUSD is now prone to major correction.

This correction can be triggered by the Sept. 07 ECB policy meeting, where we may see a "too strong euro" rhetoric from Mario Draghi.

Technically, the probable pullback will be short-term and not too deep. We expect an area around 1.1450 as an optimal place for utilizing a "buy-on-dips" strategy.

EURUSD demonstrates its rising trend since April 24, 2017, directly in the aftermath of the first round of the French presidential election, which eased political uncertainty over the EU future destiny. However, there was also positive news from the economic side, when the euro area in Q2 2017 started demonstrating solid macro statistics amid softer data coming from the U.S. and China.

The high of this rising trend channel was reached on August 29, 2017, with EURUSD breaking above 1.2000 for the first time since December 2014. Thus, we can conclude now that a three-year range-bound trading between 1.0450 and 1.1450 is over, and generally, we expect more strength from the euro in the future.

Still, this doesn't cancel the possibility of a pullback in EURUSD. The rising trend channel already lasts for 130 days, i.e. more than four months, with no corrections lower. In this time period, EURUSD appreciated by more than 11%. Such remarkable strength of this pair is unseen since its appreciation in August 2012-May 2014.

So, what can be the potential triggers of such pullback? Let's review some of the most important probable drivers of a decline.

The most important trigger of a probable decline can be a September 06-07 ECB policy meeting. Many analysts assume that the ECB can attempt to talk the euro down at this meeting since a higher EURUSD exchange rate hurts exports of the European companies. However, as George Saravelos, a currency strategist at Deutsche Bank, said:

ECB verbal rhetoric may cause a correction but is unlikely to be enough to derail Euro strength.

The discussion will be centered around QE tapering, the start of which is heavily expected by traders and investors.

However, any verbal interventions from the ECB should be supported by the macro statistics coming out of the euro area, specifically:

  • Sentix Investor Confidence (04 Sept. 9:30 am);
  • PPI m/m (04 Sept. 10:00 am);
  • Final Services PMI (05 Sept. 9:00 am);
  • Retail Sales m/m (05 Sept. 10:00 am);
  • Revised GDP q/q (05 Sept. 10:00 am); and
  • Retail PMI (06 Sept. 9:10 am).

From the U.S. dollar side, the coming week will be quieter, and we expect only ISM Non-Manufacturing PMI and unemployment claims, which should be released on September 06-07, 2017.

Technically, a solid breakout below a daily 1.1850 support level will signal an even further pullback. This pullback will not be very strong since almost all macroeconomic statistics coming out of the euro area are still extremely positive and the EU currently outperforms both the U.S. and China. The final target of this pullback can be limited by 1.1450 area. This area, which was broken upwards in July 2017, serves now as a weekly support level, and we expect a start of a new climb off that level after a successful retest.

To sum up, there is a growing evidence in support of a correction in EURUSD in the coming weeks, which still should be short-term and not too deep. That is why our preferable trading tactics will be a "buy-on-dips" strategy; specifically, we target an area around 1.1450 as an optimal place for searching for buy signals.

Since all relevant macroeconomic data from the euro area is due to be released before the ECB meeting, and September 04, 2017, will be a bank holiday in the U.S., which means little volatility, we expect a major move down taking place only from September 07, 2017. The ECB press conference will start at 1:30 pm on Thursday and the most probable outcome of this meeting would be an attempt from ECB policymakers to halt the rise of the European currency, or at least to decrease its pace. With all these assumptions in mind, it's worth to wait for a breakout of a 1.1850 level and afterward apply some intraday trading strategies for entering the market with a potential target around 1.1450 by mid-September 2017.

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.