Euro-Dollar: The Bulls are Trapped says City Index's Razaqzada

Above: File image of ECB President Lagarde. Credits: World Economic Forum, Swiss-image.ch, Photo: Valeriano DiDomenico.

Despite the calmer conditions in the stock market, the selling pressure on the EUR/USD has resumed, writes Fawad Razaqzada, Market Analyst at City Index.

The dollar simply remains the strongest currency out there, with the Fed rate cut expectations being pushed back out.

Without a fundamental change in the current macro backdrop, the EUR/USD could drop further.

Admittedly, the ECB has also tried to push back against rate cuts, but what is lacking in the Eurozone is the type of economic data beats we have seen in the US.

Investors are concerned that the major central banks like the Fed, ECB and BoE will not reduce interest rates as soon and as much as the markets have been expecting.

While in the case of the U.S., it is partly because of a relatively stronger economy, elsewhere – especially in the UK and Eurozone – it is mainly because of concerns about inflation remaining sticky, with wage pressures continuing to remain elevated.

We heard from ECB President Christine Lagarde on Wednesday, suggesting that borrowing costs could come down in the summer rather than in spring, while several other ECB officials have also expressed concerns about wage inflation. Christine Lagarde is due to speak again at 15:15 GMT today.

With the ECB pushing back rate cut expectations, the single currency may well perform better against some of the weaker currencies.

But against the dollar, it will require US data to start turning lower and fast. If that doesn’t happen, then the path of least resistance for the EUR/USD will remain to the downside.

Image courtesy of City Index.

The EUR/USD bulls will not like the fact that the EUR/USD had failed to hold onto the earlier gains after it had formed a small hammer candle right at its 200-day moving average on Wednesday when it climbed back above the broken support level of 1.0877.

On the surface, Wednesday’s price action looks bullish, and there was some follow-through earlier in the day. But many bullish patterns have broken down so far this year, and this looks to be another such example.

As things stand, the EUR/USD displayed signs that the bulls have been trapped, given its inability to hold above Wednesday’s hammer candle and support at 1.0877. So, there is an increased risk now that this bearish reversal could trigger a move to below Wednesday’s low of 1.0844, where some sell stops are undoubtedly resting.

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If we get below Wednesday’ low, the next potential downside target could be around 1.0815ish, which was the point of origin of the last rally. The subsequent bearish target is the liquidity resting below the low of December at 1.0723.

On the upside, short-term resistance is seen just above the 1.09 handle, where the backside of the broken trend line comes into play.

Even if the improved risk appetite today helps to lift the EUR/USD off its lows, the bulls will still require a higher high to form on the EUR/USD to become confident that a bottom has been formed. Actually, a potential rise back above 1.0950ish would be a bullish signal since for price to get there, we will have formed a three-bar reversal.

So, a break above 1.0950 is what I am looking for to turn tactically bullish on the EUR/USD which could then pave the way for a run on stops resting above last week’s high at 1.1000.

But as long as we don’t see such a bullish reversal pattern, the near-term trend would remain bearish amid and overall positive environment for the US dollar that we have observed since the turn of the year.