EUR/USD bullish prospects are fraying and the US dollar is on the verge of 'Wave-5'

  • EUR/USD bears assemble in supply territory with a focus on the downside.
  • The euro's bullish fundamental backdrop is fraying.
  • Positive US data gives the dollar and Wall Street bulls the greenlight.

EUR/USD is currently trading at 1.1725 having lost grip of a 1.1755 high in supply territory.

The single currency has been pulled into question by the market where participants are having a rethink as to their bullish forecasts. 

We have seen a 1.1612 low this week already. Today's low has been 1.1684.

Despite the slide in the greenback, the euro has, so far, been unable to capitalise on it fully. The DXY has dropped over 1% this week yet the euro has still to overcome resistance in the 1.1750 area. 

''In our view there are sufficient negative headlines for the market to cover short USD positions going into Q4 and question their EUR longs. We see scope for a dip towards EUR/USD1.16 on a 3-month view,'' analysts at Rabobank explained, noting the dollar's allure at times of risk-off.

''Further sharp dips in risk appetite are still likely to at least trigger bouts of USD short-covering.''

There is plenty to be watchful for with respect to risks ahead, including COVID-19, the US elections, Brexit and trade wars between both the US, China as well as the US and Europe. 

For the EUR, there is scope for the better fundamental backdrop in the EU to fray, the analysts at Rabobank warned.

''Signs of a second wave of COVID-19 in Europe will be a setback to recovery hopes and, particularly if unemployment rates rise, anti-EU sentiment may re-emerge in some countries.''

Risk appetite on Wall Street rallies on firm US data

Meanwhile, there has been an uptick in risk appetite on Wall Street today, despite the shambles that was the first US presidential election debate. 

There are continued hopes of further stimulus in signs that Congressional negotiations will continue until the bitter end and US data was also positive. 

The National Association of Realtors' pending home sales headline rose 8.8%, hitting a record high for the report, after a 5.9% increase in July, the group said Wednesday vs an expected rise of just 3.2%.

All four regional indexes saw increases on a monthly basis. On an annual basis the headline rose 24.2%, the report said.

The September Chicago Institute for Supply Management's manufacturing Purchasing Managers' Index was higher-than-expected at 62.4, the highest since December 2018, against 51.2 in August. The headline was expected at 52.

The final Q2 gross domestic product headline showed a 31.4% contraction rate versus a final Q1 contraction rate of 0.5%, the Bureau of Economic Analysis said Wednesday. The headline was expected to show a 31.7% contraction.

"The upward revision with the third estimate primarily reflected an upward revision to personal consumption expenditures (PCE) that was partly offset by downward revisions to exports and to nonresidential fixed investment," the Bureau said.

The PCE headline declined 1.6% from a 1.3% increase for the Q1 final. Core PCE, excluding food and energy, dropped 0.8% after an uptick of 1.6% for Q1.

Lastly, and before the much anticipated Nonfarm Payrolls on Friday, the September ADP private payrolls headline beat expectations, gaining 749,000 following an upward revision to 481,000 in August. The consensus was for a 648,000 headline increase.

The services sector showed an increase of 552,000 jobs, while the goods-producing sector rose 196,000.

"In September, the majority of sectors and company sizes experienced gains with trade, transportation and utilities; and manufacturing leading the way," ADP Research's Ahu Yildirmaz explained. "However, small businesses continued to demonstrate slower growth."

EUR/USD technical analysis

Moving down to the charts again, as per The Chart of the Week: EUR/USD's copy-book landing, still plenty of longs to unwind, the price of both the euro and DXY are moving exactly according to the forecasts:

The above chart shows the euro being resisted at daily resistance with the focus now shifting back to the downside.

The chart below is the 4-hour time frame.

Bears would be prudent to note that there is still a bullish environment on this time frame. 

The price can easily be supported around 1.1680 and head higher.

A break of the support would see MACD cross below zero and the price below the 20 moving average into a bearish environment.

A restest of the old support structure, turning resistance, would offer bears an area to get short or shorter, of the market for a higher probability trading opportunity. 

DXY stepping into accumulation territory

What is more, the US dollar, weighed against a basket of currencies, is heading into an accumulation zone.

In the prior longer-term analysis, this was an area forecasted to hold as part of a 5-wave pattern and confirming the reverse head and shoulders:

Weekly Reverse Head & Shoulders

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