EUR/USD poised for a rally?

Understandably, it has been a quiet session in the FX markets so far today due to the holidays in Japan, the US and Canada, and the lack of any major European economic data. Last week was a bad one for Eurozone data, most notably Germany, so this week’s numbers will probably garner more attention than usual. Amid the lack of any noticeable economic growth so far, there have been suggestions that the European Central Bank may have to bolster the size and duration of its bond purchasing programme for it to achieve the 2% inflation target. At the moment, inflation in the single currency bloc is just 0.1% and is thus hovering just above the deflationary levels. If the recent run of soft patch data continues then calls for a more beefed up QE stimulus package would grow and this would likely weigh on the euro. So far however officials from the ECB have shown little or no enthusiasm for increasing easing measures. The EUR/USD currency has of course been helped by a slightly depreciating US dollar after the recent decision by the Federal Reserve not to increase interest rates. The subsequent disappointing US monthly jobs report has further reduced the probabilities of a 2015 rate increase, even if the Fed officials – for example Vice Chairman Stanley Fischer – continue to suggest a lift off this year is still on the cards. So unless things change dramatically soon, the USD could lose further ground which could underpin the EUR/USD slightly further from these levels. Ultimately however the current fundamental backdrop argues for lower levels on the EUR/USD from a slightly longer term point of view.

As expectations about the Eurozone and US interest rate differentials continually change, the EUR/USD has been quietly making a comeback after it posted a low at just above 1.0460 in March. Ever since then, the world’s most heavily-traded FX pair has been making a series of higher lows and a few higher highs. A bullish trend line has thus been established, which has now been defended more than three times. The 50-day moving average has also been trending higher and it has now moved above the 200 SMA. This so-called “Golden Crossover” is a further bullish technical sign, which is further confirmed by the corresponding crossover of the momentum indicator MACD above the signal line (see the sub chart). What’s more, a short-term bear trend has also been taken out, as has resistance around 1.1315.

The short-term path of least resistance therefore is to the upside as we head towards another important resistance at 1.1460. This level had acted a strong resistance in the past and this time it is also where the bearish trend line that has been in place since May 2014 comes into play. Therefore a potential breakout above here could lead to further follow-up technical buying, possibly towards the August high of around 1.1710 at the very least. Thereafter is the 38.2% Fibonacci retracement level of the downswing from the May 2014 peak, at 1.1810, followed by the psychologically-important level of 1.1200.

On the downside, the old broken resistance levels such as 1.1315 could now turn into support. Below 1.1315 is the first of the two bearish trend lines, which incidentally comes in around the 50-day SMA at 1.1205. Then it is the key horizontal support at 1.1120, which needs to be defended otherwise the long-term bearish trend could resume.