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May 24, 2022

How to Trade EURUSD Now

Michael J. Donoghue
How to Trade EURUSD Now

EURUSD saw a breakout to the upside of a four month long bearish trendline on Monday, as bullish momentum caused it to close over 120 pips higher on big monetary policy news from the European Central Bank (ECB). Christine Lagarde, the ECB’s President, announced they will be pivoting away from net asset purchases, and subsequently negative interest rates, in the next several months. At the time of writing this, the EURUSD sits at 1.072 as buying pressure continues. With that in mind, let’s dive deeper as we explore how to trade EURUSD now.

Fundamental Analysis

As mentioned previously, EURUSD bulls have a lot to be excited about. Lagarde described the next steps in the eurozone’s monetary policy agenda as being something of a “turning point”, which is especially significant when traders consider that negative interest rates were an ECB precedent prior to Covid-era ultraloose monetary policy. This new direction, interpreted in conjunction with rising inflation in the eurozone, along with a solid 0.4% Q1 increase in seasonally adjusted GDP for the EU, are particularly validating for eager buyers.

However, when looking at the greater economic context, things may not be quite what they seem; peripheral, yet significant, data paint a bleaker picture for the EU than what the bullish momentum currently reflects. Unemployment in the eurozone is nearly double that in the US, the ECB lags far behind the Federal Reserve in terms of rate hike aggression, and the EU has gradually phased out frequent trade surpluses for deficits. On top of this, Europe is still in the throes of contending with the war in Ukraine and corresponding sanctions, with an EU embargo on Russian oil expected in the next few days. Thus, I estimate that the recent buying pressure for the EURUSD will be short lived, or perhaps only premature.

Technical Analysis

The recent breakout to the upside of bearish trendline(s) is impressive, with the historic 1.04 support level having prompted a powerful reversal for the EURUSD. However, I am anticipating a retest of the significant 1.07-1.08 resistance zone, and a return to bearish momentum. I imagine this retest will correlate with the DXY seeing a retest of its 1.02 support level, once a significant resistance level in March 2020. Thus, I entered a short position in the EURUSD at 1.07, and I am hoping to take profit at 1.04.

Sentiment Analysis

According to A1 Trading’s EdgeFinder tool, 31% of retail traders are currently long on EURUSD, while 69% are short, a bullish indication. This pairs well with the current COT data, which reveals about 75.5% of institutional traders going long on the USD, a decline of over 1%, while over 52% are long on the EUR, up nearly 0.5%. It is also important to note that this data, released on Friday, has not captured the bullish sentiment we have seen so far this week. However, I am still anticipating a return to form for institutional traders, wherein their orders will once again align with the general economic pessimism in the eurozone.

Key Takeaways

  • EU fundamentals may not be as good for EURUSD bulls as recent monetary policy news and price action suggest.
  • Though a significant bullish breakout just occurred, a key resistance zone now stands in the way.
  • I am going short on EURUSD, with the hopes of taking profit at 1.04.
  • Sentiment currently leans in favor of EURUSD bulls, though I imagine this will change.

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