EUR/USD struggled last week when it was given an invitation to rally

EUR/USD struggled late last week despite the Fed delivering a dovish surprise
Weakness in GBP and CNY may have contributed to poor performance
Having fallen through the 50dma, selling rallies is now favoured

The summary

EUR/USD was poor last week, finding little benefit from the Federal Reserve delivering a dovish surprise at its March FOMC meeting. The Bank of England’s dovish pivot, coupled with an abrupt weakening in the Chinese yuan on Friday, may have contributed to the bearish price action, seeing EUR/USD break its 50 and 200-day moving averages.

With little event risk to speak of in the week ahead, selling rallies is favoured.

The background

With not only the Fed but RBA, BOJ, SNB and BoE delivering dovish surprises last week, markets were given every excuse to ramp up risk appetite into the weekend but didn’t, with the US dollar index (DXY) managing to strengthen despite narrowing yield differentials with the euro and Japanese yen, the largest weightings in the index.

EUR/USD was one of the worst performers, printing a bearish engulfing candle after being rejected at downtrend resistance on Thursday, following that up with another bearish candle on Friday. Given the strong positive correlation it has with GBP/USD on a daily basis, the Bank of England’s dovish shift may explain some of the softness in EUR. With the Chinese yuan coming under pressure on Friday, that flowed through to other major FX pairs against the dollar, adding to EUR downside.

Technically, the break of the 50-day moving may be important given how influential it's been when interacting with the price in the past.

EUR/USD finished the week just above support at 1.08, looking vulnerable with momentum continuing to build to the downside. With the 50dma looking like it may cross the 200dma from above, the pair may have death cross headlines to contend with shortly, too.

The trade setup

Selling pops towards the 50dma is favoured considering the bearish price action in EUR/USD last week, allowing for stops to be placed above the level for protection.

The initial target would be support at 1.08 with uptrend support dating back to when the Fed pivoted away from rate hikes the next after that. A break of the latter could lead to a more sustained push towards the 1.07-1.0725 zone.

Another potential short idea would be to simple sell a downside break of 1.08, should it occur, with a stop above the level for protection.

A clean break back above the 50dma would signal a shift in preference to buy dips rather than sell rallies.

The wildcards

The biggest risk event for EUR/USD this week – the US core PCE inflation report – was essentially made null and void by Federal Reserve chairman Jerome Powell when he suggested strength in recent inflation reports was not enough to deter the FOMC from scaling back its expectations for easing in the year ahead. The acknowledgement hints other Fed commentary may be less impactful than usual this week.

The performance of the Chinese yuan may also be influential on EUR/USD in Asia, with a stronger-than-expected fix from the PBOC on Monday leading to a broad offer in the US dollar. As CNY weakness may have contributed to strength in the USD last week, so too may it contribute to USD weakness should the early moves on Monday be sustained.

Being quarter-end, capital flows could also throw up some unusual price action in the coming days. There may be a need to stay nimble.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.