EUR/USD: back to familiar 1.1580 levels that will suck in the bears, but...

  • EUR/USD has been consolidating in the North American session after dropping from above 1.1640, (1.1643 the high), and down to 1.1565 the session low thus far.
  • However, the bears are not making easy work of the downside - This leaves scope intact for recovery to resistance offered by the 1.1745/50 area and the 1.1790 recent high.
  • This week is a pivotal one in terms of data following last week's impressive PMIs and nonfarm payrolls wages data.

EUR/USD has been consolidating in the North American session after dropping from above 1.1640, (1.1643 the high), and down to 1.1565 the session low thus far. The current price is 1,1585 at the time of writing, a familiar level where traders are sucked into either do or die as the price fluctuates in a cent range, teasing with a break to the downside with TP at 1.1530 (regarded as a potential break-out point) only to snap back into territories on the 1.16 handle.

Bears are convinced that the dollar will rise on the basis of the continued deterioration of the emerging markets coupled with a flight to the greenback due to the trade war concerns. Moreover, the carry advantage that the dollar holds and prospects of a tighter Fed in comparison to the ECB on hold for longer underpins the case for the downside. 

However, the bears are not making easy work of it and bulls are buying the dips with big orders at key junctures protecting the downside - (1.1530 rallies to 1.1584, 1.1568 pullback rallies to 1.1615, 1.1677 rallies to 1.1643) - We have seen a similar format at the start of September as well. However, the highs have been lower within a downtrend since the 5th September and sellers have been in more control until the 1.1580's that attracts higher levels of demand making for long bullish wicks on the downside.

This week is a pivotal one

This week is a pivotal one in terms of data following last week's impressive PMIs and nonfarm payrolls wages data. For that matter, US PPI and the CPI releases are key - Bears will be looking for the CPI to underpin the case for higher rates from the Fed into the end of the year and beyond and then around the corner we have the FOMC to potentially underpin the notion of higher rates for longer. There are also real weekly earnings, retail sales and industrial production. 

Elsewhere, markets are on the alert with respect to the U.S. imposing extra tariffs on an additional $200 billion of imports from China - should the speculation that Trump will add an additional $267 billion that he threatened on Friday, just hours before China reported another record trade surplus with the U.S, materialise, one might expect additional gains in the greenback as well. 

Arguments for the upside

Arguments for the upside, approaching the 1.17 handle would include a more stable outlook for a soft Brexit, Italian politics to turn out less EU unfriendly and the market to wake up to the fact that while the EZ banks that are exposed to EM liabilities will likely see defaults on some, say, Turkish loans, they actually stand far above the European regulators Tier 1 capital ratios - (ratio of a bank’s equity to its assets), which are at around 15.% vs. the 10.50% requirement -So there should not be too much upset from contagion after all - However, we then need to see a pick up in EZ data and the divergence between the US and other developed markets remains compelling - underpinning a demand for US assets and the dollar. 

EUR/USD levels

Analysts at Commerzbank noted that EUR/USD has eased back towards but covered ahead of the 1.1510/08 supports. "This leaves scope intact for recovery to resistance offered by the 1.1745/50 area and the 1.1790 recent high. A rally above here is needed to trigger a move to the 1.1853 mid-June high and the 1.1910 55 week ma."

"Meanwhile," the analysts added, "we remain unable to rule out a retest of the 1.1508/10 May and June lows. We suspect that the recent low at 1.1301 was a significant turn for the market. The cross will need to drop sub 1.1508 to alleviate immediate upside pressure."
 

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