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.
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.
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.
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.
Learn how to trade EURUSD, the largest and most traded currency pair in the entire world. The Euro is so heavily traded due to massive economies in the United States, and European union. The need for high volumes of currency exchange between these two areas makes the EURUSD a very popular currency pair to trade. The high trading volume in this pair makes it an attractive market to trade - for both experienced and new traders. One major advantage of trading the EURUSD is that this high trading volume usually leads to tighter spreads (and hence lower trading costs + easier execution!)
When trading the EURUSD, fundamental analysis plays a large role.
A major component to the Euro rising or falling has to do with the central bank policies of each respective economy. If the dollar for example is hawkish, and has a strong outlook for the US economy, it is possible to see the Euro fall, causing the currency pair to fall.
If the Euro is strong, and/or the dollar is weak, we would expect to see weakening unemployment in the US, and/or strong figures coming from the Euro region in things like inflation (CPI), retail sales, unemployment, etc.
When trading the EURUSD, technical analysis can be a useful tool to help with entries and exits. The EURUSD shifts from being a back and forth, choppy market, to a strongly trending market.
In times of back and forth, lazy price action, the EURUSD can be a great range bound market to trade. Simple Bollinger band, and support and resistance concepts can work great when employed properly during this time.
When the EURUSD is in a trending state, watch for breakouts on the higher timeframes, and pullbacks to key levels of support or resistance.
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