It turns out everyone was horribly wrong about the Euro collapsing (yet again). Deflation never came, the economy in the US sputtered, and the economy in the EU seems to have recovered. It is true that the Federal Reserve will raise interest rates probably even before the ECB tapers its bond buying, but the market is in consensus that even with rate rises, they will be very slow and take very long.
The EUR/USD market is a very forward-looking one, and what it is telling us now is that everyone probably got a little bit too excited about Euro parity, and that everyone is still a little too excited about shorting EUR/USD.
You see, it wouldn’t be very hard to find many analyst articles that came out exactly at the bottom tick of around 1.0450 predicting parity very soon. This is exactly the kind of sentiment (complete bearishness from everyone) that causes such bottoms and trend reversals.
At this stage in the Euro rally, it seems that calls for parity haven’t really stopped, but rather been put backward a few quarters. In other words, everyone still seems to be very bearish the Euro and that tells us that price may well continue higher, maybe back to 1.20.
Market Positioning
Looking at the Commitment of Traders report, the recent record short positioning of hedge funds and professional money managers seems to have carved out a bottom in bearish sentiment.
It is tricky calling bottoms based on just COT positioning, but when combining it with price action, and what one can see on the charts, it paints a rather bullish picture if the 1.11 level holds in EUR/USD.
The key to a confirmation in our bullish reversal theory is the 1.1450 level. There is not much resistance at all after this is broken. In fact, the first level is all the way up at 1.1870, but we think a break of 1.1450 would have enough steam to eventually make it to 1.2050, although in a matter of months, not days.
Therefore, risk-reward seems to be very appetizing for longs at 1.1280, and at most 1.1150, with stops below that. Targets would be resistances at 1.1450, 1.1870, and eventually 1.2050.
This is for the most part a long-term dip-buying strategy, so focus on the levels provided below is the main idea.
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