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EUR / USD – change of mood in favor of the euro

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Change of mood in favor of the euro

“It hardly matters which scale investors use: the volatility of the EUR / USD currency pair is as low as it was last before the financial market crisis – sometimes even lower. This makes the euro vulnerable to sudden price movements compared to the US dollar. This thesis is one of the absolute core messages of 2020. “We took the quote one-to-one from the closing plea of ​​our outlook for the year. In addition to “more” volatility, we forecast a final EUR low against the greenback to close the “Macron gap” at around USD 1.08. Since the EUR / USD currency pair is practically traded around the clock, there is only a narrow time window at weekends, at which a gap in the exchange rate can even occur. The relevance and attractiveness of such gaps in the currency area is correspondingly great. At USD 1.0635, the single European currency actually had to accept a new, cyclical low in March. Our annual timetable has (so far) proven to be an important benchmark. But now – due to the EUR upward movement of the past three months – the question of a fundamental change in the tide is at the expense of the USA.

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EUR / USD (Monthly)

Chart EUR / USD

Source: Refinitive, tradesignal, as of 07/24/20

External rod of special quality

In our view, the monthly chart of the currency pair represents a suitable starting point for answering this question. We would first like to come back to the “simple part” of our annual forecast – namely a higher fluctuation intensity. The March candle of the EUR / USD currency pair is the most impressive illustration of the increased volatility. While less than 7 US cents were between the annual high of $ 1.1573 and the low of $ 1.0878 in 2019, the high-low range in March alone ($ 1.1492 vs. $ 1.0635) was the one entire fluctuation range of the past year in the shadows! The extremely fluctuating March candle plays a crucial role in the further analysis of the currency pair. Finally, the trading range of almost 9 US cents creates a so-called external staff. This is even a very special “outside candle” because the March candle encloses the 13 (!) Previous monthly candles and the three following (see Chart 1). The limits set at USD 1.0635 and especially USD 1.1492 are essential for the further price development.

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EUR / USD (Quarterly)

Chart EUR / USD

Source: Refinitive, tradesignal, as of 07/24/20

Seen the year low?

But the massive outer rod described is not the only finding of the long-term analysis of the currency pair: In addition, the striking fuses of the monthly candles from February to May catch the eye. Solving the monthly lows on four consecutive months signals the fundamental change in tides. The single European currency should therefore be very well supported in the 1.07 / 1.06 USD range compared to the US dollar. Against this backdrop, the March low of $ 1.0635 should mark an important cyclical low. We even lean out of the window so far that this low should represent the annual low for 2020. On the upside, the combination of the 38-month line (currently at $ 1.1475) and the much-cited March high is just the start of a massive resistance zone. In relation to the greenback, the euro has also marked various highs and lows between USD 1.15 and USD 1.18 during the last decade. I.e. at this level, an important, horizontal bundle of barriers is created.

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EUR / USD (Monthly)

Chart EUR / USD

Source: Refinitive, tradesignal, as of 07/24/20

1.15 / 1.18 USD: Technically a big board

But that’s still not all. Rather, the price range between around USD 1.15 and around USD 1.18 represents an extraordinary resistance belt. At around USD 1.17, a Fibonacci cluster also consists of three different retracements (1.1684 / 1.1716 / 1.1734 USD; see chart). But the worst is undoubtedly the base downtrend since 2008, which has existed since the high of $ 1.60 (currently at $ 1.1874 on a monthly basis). The bundle of barriers discussed is rounded off by a resistance derived from the annual pivot point (USD 1.1561), which we traditionally calculate for the annual outlook based on the high, low and closing prices of the previous year (see chart below). To give the euro a sustainable perspective, it is therefore necessary to break the resistance zone at USD 1.15 / 1.18. Since the MACD has just generated a new entry signal, we consider a test of the key zone mentioned to be quite realistic in the next few months. However, due to the importance of the resistance to accumulation, a direct walk becomes a difficult undertaking. Rather, the single European currency should first bounce off the hurdles and gather new strength.

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EUR / USD (Quarterly)

Chart EUR / USD

Source: Refinitive, tradesignal, as of 07/24/20

Long-term perspective “depends” on the bearish trend

In the next step, we would like to take a look at the somewhat larger “glass ball”. Say: what if? What will be the starting point if the euro breaks the long-term bearish trend of the past 12 years? We anticipate the core message: From a technical point of view, such a liberation would be an absolute “game changer”. After all, such long trends on the currency side are not abandoned every day. If successful, the average of the last 38 quarters (currently at $ 1.2048) defines an important milestone, especially since this smoothing line is in perfect harmony with the 2012 low ($ 1.2040). If there is a breakout on the upside, the euro against the US dollar may even target the multi-year high of March 2018 at USD 1.2555 in the long term. The resistance there is additionally reinforced by the 200-month line (currently at $ 1.2632). Another very large switching point then arises here, since a jump over the cross resistance described would have caused the stabilization to turn into long-term bottom formation since the beginning of 2015. But first of all, such a turnaround is wishful thinking and a dream of the future.

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EUR / USD (Quarterly)

Chart EUR / USD

Source: Refinitive, own calculations, as of 07/24/20

USD index: trend reversal is taking shape

Traditionally, we also take a look at the USD index when creating the currency outlook. This reflects the development of the greenback compared to the six most important trading currencies EUR, GBP, JPY, CHF, CAD and SEK. Here, too, a turnaround is now emerging. In the half-year chart, there is a shooting star for the first six months of 2020. On the striking wick of this negative candle pattern, investors can make the failed attempt to sustainably overcome the round 100 mark. A number of attempts to overcome this hurdle failed in advance. Over the past five years, the USD index has repeatedly dealt with the resistance described, so that the risk of a top formation cannot be dismissed out of hand (see chart). The break in the upward trend since 2011 (currently at 94 points) would emphasize this scenario and put the holding zone at 90 points in focus. The corresponding level to the mark of just over USD 1.25 for the EUR / USD currency pair is only the low of June 2018 (88 points). A slide below it would complete the upper reversal in the USD index.

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USD index (semi-annually)

Chart USD index

Source: Refinitive, tradesignal, as of 07/24/20

Conclusion and final argument

With the March low at $ 1.0635, the euro may have seen the predicted final low for the day versus the US currency. Since then, the long-term turnaround has clearly been taking shape. Although the conclusion of this is still a long way off – and rather not to be expected in 2020 -, the mantra of technical analysis, according to which the (USD) trend is your friend, no longer seems to apply in the future. Instead of “sell the rallies” there is currently a paradigm shift to “buy the dips”. On the way to a strategic foundation of the single European currency, the resistance cluster between USD 1.15 and USD 1.18 forms a barrier bundle that is unparalleled in terms of importance. The hurdles there mark an important key zone for EUR / USD development in the further course of 2020.

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EUR / USD (Monthly)

Chart EUR / USD

Source: Refinitive, tradesignal, as of 07/24/20

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