EURUSD was choppy at the start of trading on Monday, but economic data outcomes are capping the rallies. In my view, dips should be well protected and could come out of the ranges in the coming weeks. The return of dollar weakness could strengthen the G10 basket.
Eurozone manufacturing sector moves closer to stagnation, according to HIS Markit. The January PMI and the other set of data points revealed that the economy is still running in lower gear led by trade concerns and political developments within Europe, especially the German economy is experiencing a downturn.
- The preliminary flash estimate for the fourth quarter of 2018 GDP up by 0.2% in the euro area.
- Euro area annual inflation is expected to be 1.4% in January 2019 according to a flash estimate from Eurostat.
- Eurozone Manufacturing PMI registered 50.5, down from 51.4 in December, unchanged from the flash estimate, according to HIS Markit.
German Industrial Production to be the big focus point for the euro traders this week (Feb 04-08). Back in November 2018 German IP fell by 1.9% mom, sharpest decline since 2015. Whereas we expect the IP slightly rebound in Dec 2018.
Any rebound is likely to be too weak to push industrial activity back into expansion territory, but private consumption and government expenditures should have been enough to prevent the entire economy from falling into a technical recession, according to ING.
EURUSD volatility is very low over the past few months, but recent Fed’s dovish turn could be the catalyst for euro bulls. The technical landscape for EURUSD hasn’t changed since mid-November 2018.
The price recouped from 1.1215 and managed to breach the narrow range in early January 2019. Since then the new range is capped by 200MA. We believe the return of the dollar weakness is the very catalyst for the major to break higher through the new range of 1.1570-1.1270. A move beyond Jan 2019 high would unfold next leg of the rally towards 1.1680 and 1.1770 (short covering move).
We advise traders to trade with a cautious bias and follow strict stop losses below 1.1200 for longs. Last month’s impulse move has laid a foundation of higher low pattern between 1.1300-1.1270.
Ahead of the German IP data the key support finds at 1.1390 followed by 1.1300/1.1270. If the price starts moving higher, key resistance levels to watch out are 1.1500/1.1515 and 1.1570.
On the daily chart, the price is developing a bearish H&S pattern with shoulders seems between 1.1495-1.1515. If price fails to close above in a day or two, could retrace back to the neckline 1.1300.
Turning to FX positioning, Since Monday, January 28, positioning has shifted slightly. Within G10, the largest short is in EUR; the largest long is now in USD according to Morgan Stanley.
In an FX Positioning Tracer note, Strategists Gek and Andrew said: “EUR positioning more short.”
They reported “A notable reduction in Japanese retail accounts’ long EUR positions drove the aggregate EUR positioning score into the more short territory. EUR sentiment improved on the margin, and we estimate that macro hedge funds were buyers of EUR, but these changes were smaller than increased short positioning by Japanese retail accounts. Significant short EUR positioning could lead to outsized positive moves as macroeconomic data stabilize”.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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