The EUR looks to have been the primary beneficiary from the unwinding of long USD positions after the tepid inflation number and dovish FOMC minutes yesterday. On the face of it, it looks due to short covering, even though the arguments in favour of the euro as a funding vehicle for carry trades are compelling.
See my discussion of this topic here: US markets spark EUR traders into action
. We will get an indication later today on whether the euro can stand on its own two feet when the flash PMIs for France, Germany and the Eurozone are released.
After last week’s slightly disappointing GDP number, expectations aren’t high but the rally in EURUSD would gain momentum on a positive surprise. On the other side of the coin, a weak August Manufacturing PMI out of the US would add to the gloom descending on the dollar.
Management and risk description
The euro has recovered well this week (as anticipated) and there is more upside ahead for EURUSD.
While holding support at 1.1200/1.1185 (and closing above this in New York at the close of trading later today) the EUR displays a completed two-month Inverse Head and Shoulders structure, with an upside projection toward 1.1640 (refer daily chart below).
Of course, multi-month Symmetrical Triangle resistance at the 1.1380 level must be surpassed in the meantime.
Today, support lies at 1.1220/1.1185 to yield rally onto 1.1280 and then key 1.1350/1.1380 resistance.
I have outlined a trade (below) to capitalise upon this developing situation.
Entry: for today: buying EURUSD at market (currently trading the 1.1230).
Stop: 1.1173, initially.
Time horizon: allow a few days for target to be met.
EURUSD daily chart (click to expand)
EURUSD weekly chart (click to expand)
Source: ThomsonReuters. Create your own charts with SaxoTrader; click here to learn more
— Edited by Gayle Bryant