eurusd
The EURUSD pair keeps holding above the 1.19 level, defying everything. By everything, we may think of the ECB that voiced its concerns about a higher exchange rate. We may also think of the technical patterns that look bearish – and yet the EURUSD refuses to fall. Finally, the ECB financial stability review released this week points to an extreme economic weakness for the rest of the year and for the next, too.
But this is an exchange rate and not one single currency. The EURUSD pair reflects the value of one currency in terms of another. At this point, the world seems to have found a consensus regarding a weak USD for 2021. Some investment houses predict that the USD will weaken by as much as 20% next year.
Another thing to have in mind when trading the EURUSD pair is the time of the year we are in. December begins next week, and only three important economic events are left.
One is the NFP next week on Friday. If we interpret the market’s reaction to the jobs data in the last months, we may discount it.
Another is the ECB decision two weeks from today. This is the main event for the EURUSD, and it may be that the EURUSD trades with a bid tone all the way until the ECB meeting. Even if the pair corrects a hundred or two-hundred pips, it will still look overpriced in the eyes of the ECB.
Finally, three weeks from now, there is the last Fed meeting of the year. The market fully expects the Fed to ease. However, giving the high EURUSD exchange rate and the fact that the ECB meeting is one week earlier, we may see a more aggressive ECB to compensate for the Fed easing a week later.
The ECB just released this week its Financial Stability Review. A comprehensive report, the review covers multiple areas such as macro-financial and credit environment conditions, macroprudential policy issues, the non-bank financial sector, but also the state of the financial markets.
On this last point, the report keeps a dovish tone – in line with the ECB’s views. It emphasizes the net negative credit rating outlook, the high-yield firms rated B- or lower, or the growing equity sector dispersion. Moreover, the report notes extremely stretched valuations in some asset classes.
Can one such class be the exchange rate? Considering that the ECB included the high exchange rate against the USD as a concern, we should not be surprised if this is the case.
As mentioned earlier, the EURUSD is stubbornly strong. In a way, it reflects financial markets’ price action during Thanksgiving week. More precisely, major currency pairs rarely reversed trends during Thanksgiving week.
So, the EURUSD kept marching higher. It dropped 100 pips last Monday from 1.19 to 1.18. However, it bounced slowly but surely, proving the Thanksgiving theory right. Not only that, it regained 1.19, but now it has a hard time letting it go. It rose today as high as 1.1940.
Yet, this is no place to be long. Both the fundamental and technical picture look weak. While we covered the fundamental aspects earlier, here is the technical picture.
This is a rising wedge. Moreover, it looks like the wedge broke lower. If that is the case, bears would want to stay on the short side with a stop loss at today’s high – 1.1940 area. How about the target?
A rising wedge is typically a terminal impulsive structure under the Elliott Waves Theory. It means that by the time the lower edge is broken, as it looks like right now, the market should fully reverse the move prior to the wedge formation. Effectively, it means a move back to 1.16, the level where the recent bullish trend started.
That level coincides with the US election day on November 3rd. Moreover, at the same time, the US equities began their recent ascent. Does the EURUSD signal a reverse in US equities too? Not necessarily.
It could very well be that the market prepares for the ECB. Also, the end of the month nears, so profit-taking might be the case too.
