Time out for the EURUSD

Bullish EURUSD has been one of the dominant themes for currency markets in past months and one that we have discussed with regularity since May.

FOREX 4

As exciting as the EURUSD’s rally has been and despite retaining a bullish medium-term view courtesy of negative U.S real rates, the political and fiscal landscape and optimism around the EU recovery fund, a subtle shift occurred last week that warns in the short term the EURUSD rally appears set to take some time out.

Despite rules in Europe on mask wearing and social distancing, a rise in new coronavirus cases in key countries including France, Spain, and Germany is sparking fears that Europe is on the verge of a second wave.

The possibility of new restrictions presents a threat to the recovery and may have played a role in last Fridays disappointing Eurozone composite PMI data for August, which came in at 51.6 vs estimates of 55.0. The services component a notable drag, coming in at 50.4 vs estimates of 54.5.

This contrasts with developments in the U.S. as new coronavirus cases have fallen in recent weeks, particularly in the hard-hit sunbelt region. The falls likely to have played a part in last Fridays impressive U.S. PMI data as the composite index rose to 54.7 from 50.3, with strength across both the manufacturing and services sectors.

The effect of this was the EURUSD closed lower last week for the first time in nine weeks. Technically, the rejection/exhaustion from ahead of the psychologically and technically important 1.2000/50 resistance level suggests a pullback has commenced.

On the downside, support is initially viewed 1.1710/1.1690 area, before trendline support 1.1650/30 and then the March high of 1.1495. The plan will be to allow the correction to develop towards these support levels and to wait for an appropriate setup to rebuy the EURUSD in anticipation of the uptrend resuming.

Keeping in mind that a sustained break above 1.2000/50 would indicate the EURUSD has commenced the next leg higher, towards the February 1.2555 high.

Time out for the EURUSD

Source Tradingview. The figures stated areas of the 24th of August 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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