The EURUSD managed to surprise market participants with its sharp rebound from the 1.05 area all the way to the 1.11. Many, especially the retail side, are positioned for parity to come sooner rather than later.
I’m not arguing that statement, as from a fundamental point of view it seems that EURUSD should go even lower. After all, the bond-buying program in Europe only started in March, and the ECB’s (European Central Bank) intentions to expand the central bank’s balance sheet are pretty clear. Even the target is clear enough, with the central bank willing to let it expand all the way to the one trillion mark, meaning one trillion worth of bond buying, as the current level is around two trillion.
That is a vast amount and calls for way lower levels in the EURUSD exchange rate, especially when you consider that the Federal Reserve in the United States is about to hike the rates.
There is also technical analysis to consider, and from a technical analysis point of view, the EURUSD is forming a very interesting pattern.
First of all the whole move from 1.40 all the way towards almost parity is not an impulsive move: the legs are almost equal, there is no extended wave, and moreover, it is channeling too well. These are not characteristics one should look for in an impulsive move as we need alternation between corrective waves of a lower degree, not to mention that channeling is out of the question.
Second, each selling wave has been followed by little or no retracements, and this is simply not happening in impulsive waves as well.
Last but not least, and perhaps the most important thing to consider is, the last move lower, the one that almost reached parity, is coming after a bottoming formation: a running variation of a contracting triangle.
While the name sounds pretty exotic. This pattern is signaling a bottom is to come, and the fact that it’s appearing on bigger time frames means the bottom will be one to be remembered.
Therefore, I am favoring the long side on the EURUSD pair, being a net buyer on any move around parity, and looking to add to the long side by the time USDJPY and USDCAD hit 124 and 1.29 respectively, as those too are forming a 5th wave in a five waves structure.
Between the fundamental and technical picture, I favor the technical one this time. The coming week will no doubt reveal all.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
