EURUSD Reversal or Correction

One of the strongest trends in FX during 2017 was the relentless appreciation of the EURUSD as it rallied from below 1.0350 to a high of 1.2555 in a little over 12 months. In recent months, the EURUSD has mostly traded sideways, consolidating the gains of 2017 between 1.2155 and 1.2555.

Until last week, when a combination of extreme long positioning in the EURUSD, widening interest rate differentials and a view that the U.S economy may return to a stronger growth profile in Q2 (particularly when compared with that of the Eurozone) combined to see the EURUSD not only break below its long standing uptrend. It also broke through the bottom of its three month range as viewed in Chart 1.

That said, neither of the themes mentioned above were particularly new and the timing of the US Dollar bounce appears to have caught some off guard. Perhaps it was a case that post Thursdays ECB meeting, traders sharpened their focus on upcoming events and data in the U.S which include the release of personal income, ISM manufacturing, and Payrolls data this week. Not to mention the FOMC meeting in which U.S Interest rates are widely expected to remain on hold. However, the tone of the FOMC statement is expected to be upbeat, framed by upbeat comments on both growth and inflation.

Ahead of these events, the monthly chart (Chart 2), reveals the EURUSD has started edging lower away from multi year trend channel resistance. The question thus becomes is this the beginning of a reversal lower for the EURUSD? Or is the current decline a correction before the uptrend resumes?

My view is that the uptrend of 2017 remains the dominant medium term market theme and that the current move lower is a correction to the uptrend. The downside targets for the correction start with the 200 day moving average currently sitting at 1.2010 and then below that, the 38.2% Fibonacci retracement at ~1.1720ish.

Short term traders may look to trade the move lower. However, keep in mind this is a counter-trend trade move and be sure to be alert for signs of a base. The better trade may come from the long side once a base has formed and the EURUSD uptrend resumes.

Source Tradingview. The figures stated are as of the 30th of April 2018. 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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