EURUSD about to see a deeper correction due to a USD reversal?

By Admiral Markets

Source: Economic Events August 21, 2020 – Admiral Markets’ Forex Calendar

Instead of our preferred deeper short-term correction towards 1.1400/30, which would have delivered a trading setup with a more attractive risk-reward ratio, considering our midterm expectation of the EURUSD going back above 1.2000 based on our last research article for the EURUSD, the currency pair instead pushed to substantially above 1.1900 before the FED Minutes on Wednesday.

That push was then followed by a sharper drop back towards 1.1800. What happened?

We are still bullish on the EURUSD. However, the short-term mode seemed a little extended on the upside with non-commercials having built their biggest net-long position in Euro Futures since 2018.

Secondly, it also became clear that the recent USD weakness was likely driven by market participants anticipating a “rate cap” from the FED sooner rather than later. This expectation proved to be inaccurate, at least in the short-term, with some FOMC members expressing concerns about such yield curve control, as it could result in excessive balance sheet growth.

So, the latest economic data from the US significantly surprised on the upside with the Citi Economic Surprise Index pushing from one All Time high to another in recent weeks and months, indicating that 10-year US yields are simply too low from a pure global macro perspective. A strong move higher could be imminent, in which case the US central bank would have to act, since such a move and potential rotation from growth stocks back into value stocks would result in elevated volatility in Equities, something the FED likely will not let happen in the current, very fragile market environment.

That said, any solid US economic data could result in further USD momentum, leaving EURUSD in its extended mode, vulnerable to a sharper correction back below 1.1800 in the near-term, i.e. today’s Markit PMI’s surprise again on the upside.

Technically, EURUSD remains bullish above 1.1700. A drop and daily close below would interrupt the bullish sequence on D1, neutralizing the bullish picture in the short-term:

Source: Admiral Markets MT5 with MT5SE Add-on EURUSD Daily chart (between May 13, 2019, to August 20, 2020). Accessed: August 20, 2020 at 10:00 PM GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the EURUSD fell by 10.2%. In 2016, it fell by 3.2%. In 2017, it increased by 13.92%. In 2018, it dropped 4.4%, and in 2019 it fell by 2.2%, meaning that after five years, it was down by 7.3%.

Discover the world’s #1 multi-asset platform

Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!

Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter “Analysis”) published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:

1. This is a marketing communication. The analysis is published for informative purposes only and is in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
2. Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
3. Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter “Author”) based on the Author’s personal estimations.
4. To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
5. Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures that refer to any past performance is not a reliable indicator of future results.
6. The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
7. Any kind of previous or modelled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
8. The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
9. Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.

By Admiral Markets