The exchange rate of the main currency pair EUR/USD has risen from around 1.06 to almost 1.24 since March, and it all started when the pandemic hit the financial markets. Then a turnaround in USD quotes took place. However, the uptrend seems to be waning lately.
According to the U.S. CFTC, there may have been a so-called crowded trade on the USD index futures contracts, which means that anyone who wanted to trade for a decline in the USD has already done so by opening a short position in the futures market. This, in turn, could also mean fewer people willing to trade for a rise in EUR/USD. Despite the recent deceleration in the trend resistance under 1.24, the Citi EUR Pain index may still show a very significant long positioning in the common currency, close to previous trends. Thus, profit taking from these positions may still be in play in the near term, according to data reported by Bloomberg.
It is worth keeping in mind the possible extension of economic restrictions in the Eurozone until the end of March or longer, which could be associated with a recession in the first quarter of 2021. In the US, a new $1.9 trillion aid package has emerged, as announced by Joe Biden. This in turn may favor the USD against the EUR due to the economic outlook, at least in the short term. Thus, the base scenario may involve a corrective strengthening of the USD, and then the depreciation trend of the US currency may return. According to UBS Wealth Management, the euro may cost USD 1.24 in March, USD 1.25 in June, and USD 1.27 in September and December.
On the chart of the EUR/USD exchange rate (we show it on our profile at tradingview.com - https://www.tradingview.com/chart/EURUSD/l3Vh9X1O-EUR-USD-stronger-dollar-after-Elliott-wave-pattern/) we may observe a potential pattern known from the Elliott wave theory. Since March, the quotations formed a five-wave upward structure, where the potential range for the fifth wave equal to 161.8% of the first wave is placed in the area of 1.2430. Two weekly candles with relatively large upper shadows could also show the potential exhaustion of the trend. However, the confirmation of a possible turn of the trend would be only after defeating the lower limit in the main trend channel. If this line was broken, the way towards 1.17-1.16 could be opened.
Thus, it seems that in the short term both fundamental and technical factors may favor the appearance of a correction on the EUR/USD pair along with a temporary strengthening of the USD on the broad market.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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