Euro Dollar Analysis – September 2020

*Taking a look at the EURUSD FX currency pair including macroeconomics and technical analysis*

Welcome back to the blog. I apologise for the lack of content in the past week, I have been extremely busy working on a small project which involves coding a higher timeframe stock trading strategy into Microsoft Excel to generate automated systematic trade signals. It is now complete and I will back to producing more regular blog content.

In this blog post I am going to talk to you about the EURUSD FX currency pair. It is a major pair, sometimes called “Fiber” by older traders and it is the single most traded FX currency on the markets. The Euro has seen strong buyer demand since the yearly price lows were formed back in March 2020 on the back of the coronavirus pandemic when investors initially flocked to safe haven currencies like the USD and Yen.

EURUSD weekly timeframe chart.

As you can see on the chart above which shows the last 7 years of price for the Euro Dollar, it has used the second and third quarters of 2020 to recover a large amount of the losses it has experienced over the past 2 years prior.

Historically, the EURUSD short trade has been a great carry trade. The Eurozone has had negative interest rates for some time and the U.S. Dollar has had strong positive rates. This has meant that continued short selling on the FX currency pair has been favoured by many institutions and funds but this all reversed in March this year when the coronavirus pandemic hit.

As of the end of last month, August 2020, bullish speculation on the EURUSD FX currency pair was at its highest since records began when the Euro was first introduced. That is quite a large statement being made by traders who are betting on continued U.S. Dollar weakness and therefore buying the Euro as the counter currency. This is shown below.

Below the price chart you can see the Commitment of Traders (COT) reports for the EURUSD FX currency pair. Asset Managers and Institutions (green line, lower chart) are now the most bullish on the Euro Dollar than they have ever been and Large speculators are also net long on EURUSD by the most amount since 2015. This is looking to continue for some time.

The U.S. Federal Reserve have taken an even more dovish tone in recent weeks having openly embraced inflation and the Fed Governor Lael Brainard admitted that they will not be using an interest rate hike to control inflation any time soon.

Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.

The issue with a currency getting too weak too fast is that it can seriously effect the economics of the markets it participates in. A weak dollar makes U.S. exports extremely attractive to foreign consumers and this will then reduce demand for home economy goods.

However, it is not just Dollar weakness that has caused the Euro to gain strength. If you look at the chart below, you can see that over the past 12 months the Euro has risen against the currencies of its main trading partners with the majority of that occurring post March 2020.

The European Central Bank (ECB) are worried about a continuing rise in vale of the Euro against its main counter currencies and especially the U.S. Dollar. ECB chief economist said last week “The euro-dollar rate does matter,”. “If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting.”

If the currency keeps appreciating it will weigh on exports, drag down prices and intensify pressure for more monetary stimulus. This is even more troubling or potentially troubling for Europe when demand is already low thanks to the coronavirus pandemic and global travel restrictions.

Inflation vs deflation.

A stronger Euro has the effect of deflation on goods and services which is as bad, or arguably worse than inflation. The ECB is expected to cut its 2022 inflation forecast next week from 1.3 per cent to 1.2 or 1.1 per cent to reflect the deflationary impact of a stronger euro on the price of imports and this will increase the pressure on the ECB to consider upping its stimulus.

The most effect method to counter act a strong currency is for the central bank to cut interest rates but this would be a last resort for the ECB. The euro zone central bank rate has been at -0.50% for some time now and going lower is entering potentially dangerous territory. Therefore this is unlikely to occur anytime soon.

Technical analysis.

I know that some of you may be reading this blog post and wondering what this all means for actually trading the currency pair and making money. Well, if the current fundamentals are to continue then buying the Euro should prove profitable.

The daily chart below shows that last 5 years of price action on the EURUSD currency pair.

EURUSD daily timeframe chart.

As you know, price tapped and rejected the 1.20 key price level last week before selling off around 200 pips to where it is now. However, you may not be aware that almost 2 years ago to the day, it did exactly the same before then going on to climb around 1000 pips (more than 8.6%) over the following 3 months. I have marked this on the chart above.

As technical analysts, the main theory behind the success of technical analysis is that the markets tend to repeat themselves over and over again as time goes on. If this is to be the case then buying the Euro Dollar at around 1.16 could prove very profitable if the currency pair plans on repeating 2017/18 again.

It is important to remember that trading on the back of macroeconomic principles is not the same as catching 50 pip moves on an intraday price range trade. These are long term price movements that can takes weeks and month but will return 500+ pips in a single direction. When trading long term moves like this it is even more important to understand risk management and costs of trading. Negative carry charges will eat in to profits if the trade begins to drag out longer than expected.

To learn more about carry charges, please click on the link below to read my previous “market dynamics” blog post.

Top Tip: If you are not in the position to be trading long term trades then use this higher timeframe knowledge to your advantage and incorporate it in to your lower timeframe trading. Remember, trading with the trend is usually the best method of trading.

If you are interested in learning my personal trading strategies, please consider my Mastering The Markets – Retail Trading Course. Head over to my Trading Education page to check out all of my education packages and the deals available.

Useful Links:

All my technical analysis is done using the TradingView platform. You can get access via the link below.

My preferred broker of choice is IC Markets. Low spreads and trading costs really help long term profitability. A link to their site is below.

FTMO Trader Funding Programme.

Thanks for reading and please don’t forget to LIKE, SHARE and FOLLOW my blog to stay up to date with the latest market analysis and trading education posts.

DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.

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