Euro to US Dollar is Showing the Potential for a Pullback, according to Commerzbank
The Euro to US Dollar is looking shaky just below its 1.1300 highs.
The peak has not been matched by a simultaneous rise in momentum.
Momentum, as measured by RSI, has started going down whilst the exchange rate has gone up, and this divergence between the two is an early warning sign of weakness.
“We note the divergence of the daily RSI and the daily Elliot wave count, which is suggesting that we allow for a retracement back to circa 1.1010,” said Commerzbank’s Karen Jones.
The “Elliot wave count”, Jones is alluding to, refers to a type of cycle analysis in which upcycles composed of 5 waves are followed by downcycles of 5 waves.
The current small upcycle which started in February has just completed its wave 3.
This means with 4 and 5 are still to come. 7
Wave 4 is always a correction of three, and this is what the count appears to be suggesting will happen now, back to the 1.1010 level.
This does not mean the end of the uptrend, however, and after 4 has finished wave 5 is expected to move up and make new highs, even above those of wave 3 at 1.1300.
As far as this longer-term bullish outlook goes, Jones says:
“Above 1.1300, the market has potential to reach the highs from mid-2016 circa 1.1429 and the two-year resistance line at 1.1474, however, we believe it will struggle here from a longer-term perspective. We note the 78.6% retracement lies at 1.1343.”
EUR/USD Fundamentals
The ECB is expected to strike a moderately dovish tone at today’s rate meeting with a chance EUR/USD may pull-back on the news of a delay of tapering QE due to subdued inflation forecasts.
Helaba economics’ Ralf Umlauf underlines the risks to the pair from the ECB meeting.
“A very hesitant ECB offers no reason to expect a leap to new heights. Key supports are located at 1.1110 and 1.1076. Trading range: 1.1180 – 1.1330,” said the economist.
It EUR/USD does pull-back, however, many analysts – including the FX team at Bank of America and TD’s Mark McCormick - are suggesting it would be a good time to ‘buy the dip’ – advice which chimes with Commerzbank’s wave 4 correction, followed by 5 higher technical hypothesis.
“We would look to buy EUR on dips, in line with our forecast profile and outstanding trade recommendation, as the underlying trend is likely to remain intact if the market simply rolls these (QE tapering) outcomes forward to September," said Credit Suisse’s Shahab Jalinoos in a comment on EUR/USD.
As such the dominant short-term uptrend is likely to continue – with risks skewed to a surprise higher if the ECB is not as dovish as expected.
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