The euro is still looking extremely bearish against the US dollar due to the strong negative technical breakout last week and also developments surrounding the US dollar.
Last week the US dollar index posted one of its biggest gains in the currency markets over the debt ceiling and possible liquidity crisis, which caused the EURUSD to trade towards the 1.0900 handle.
The divergence with the Fed and ECB has not affected the euro positively at all. ECB President Christine Lagarde has already made clear that more than one interest rate hike is appropriate in the battle against stubborn Eurozone inflation.
Economists at Commerzbank still expect a solid EURUSD performance this year, which also hints that we could see a late rebound if 1.0800 area holds up.
Commerzbank note “Our ECB watchers continue to expect the ECB to resist rate cuts next year. As long as this is the case, while the Fed is cutting, it still seems plausible to us to bet on well-supported EURUSD levels towards the end of the year.”
Due to the fact that the euro has the largest weighting inside the DXY basket of currencies it is likely that if the US dollar technical up move continues, we are likely to see EURUSD weakness.
The 1.0800 level should be key in determining a further breakdown or a reversal. I would expect that the pair could eventually headed down towards 1.1200 level and then possibly as high as the 1.1500 level later in the year if the 1.0800 manage holds.
The ActivTrader Sentiment tool suggests that 41% of traders are bearish on the EURUSD. This is still bad news if we consider that traders are still that bullish despite the latest price rise.
As traders, we typically look to fade retail sentiment when it is overly skewed in one direction. This style of trading, fading sentiment, has been one of the most effective and used tactics of hedge funds.
The EURUSD is currently showing a bearish technical development called a technical range break out, this usually is suggestive of lower prices to come.
This is a bearish chart for the EURUSD in the short-term for buyers. What we need to see is the EURUSD pair continue to make higher highs on a weekly basis now to negate this bearish development.
According to the daily time frame, the pair has broken above a large head and shoulders pattern, which has projection for the EURUSD of around 500 points.
As long as the EURUSD pair stays above the 1.0800 price level then medium-term analysis shows eventual strength is likely towards 1.1500.