Hi traders,
Today's investment thesis is simple, which is that I foresee a rise in the EUR against the USD intermediate term. Here's a breakdown of the technicals and fundamentals:
Technicals:
Strong support level on the 4H (marked orange) and this level has also been tested on the daily timeframe previously.
RSI oversold (yellow arrow on RSI). Marked on the RSI are blue arrows indicating previous oversold periods, and we can see that the market reaction in the intermediate-term (orange arrow) has pretty much always been bullish historically after the oversold signal given on the 4H.
Recently, on the 25th of July, the EUR hit a 2-year low at 1.1102. Obviously, this would also present a strong support level.
Fundamentals:
On the 25th of July, the EUR hit a 2-year low at 1.1102. This is due to the fact that traders expected a more dovish ECB. However, with the ECB instead holding rates, the EUR did end the week at a price higher currently of 1.11281 against the USD. Although the ECB did seem to be more open to a rate cut in the future, hence why initial gains of a rate cut were retraced, I'm not too concerned about this for this trade given that we are capitalizing more on a potential intermediate-term trade given a rate cut catalyst and support.
More importantly, the Fed is set to announce rates on July 31st. I predict a cut of 25 basis points, bringing the target rate to 200-225 basis points compared to currently 225-250. This would weaken the dollar, as lower rates mean a weaker currency. Although markets have to an extent, priced this in, (see the US equity markets rallying to new highs recently) I still think there is room in the 4H timeframe for the EUR to rise against the USD if rates are cut given the ECB's rate hold. We can also see a previous reaction to rate cut sentiment on July 10th and July 11th, where a more dovish Powell testimony sent the EUR rising against the USD (green zone marked).
Currently, stop loss is set to 1.11, below the 2-year low and also as a rounded number. Take profit is set at 1.12505, under the resistance area noticeable at 1.27. This gives us a nice risk to reward of 4.39.
As a whole, this offers us a great intermediate-term trade opportunity, assuming the Fed does indeed cut rates, which at this point seems highly likely (78.6% chance 25BP cut, 21.4% chance 50BP cut on CME FedWatch). If Powell surprises us and doesn't cut rates, obviously don't take the trade as the EUR will without a doubt fall much lower against the USD. With 3 days left before the FOMC meeting, I may not take the trade right now and instead observe price's reaction at the support level, but will definitely enter at least a day or two in advance.
Thanks for reading!
Today's investment thesis is simple, which is that I foresee a rise in the EUR against the USD intermediate term. Here's a breakdown of the technicals and fundamentals:
Technicals:
Strong support level on the 4H (marked orange) and this level has also been tested on the daily timeframe previously.
RSI oversold (yellow arrow on RSI). Marked on the RSI are blue arrows indicating previous oversold periods, and we can see that the market reaction in the intermediate-term (orange arrow) has pretty much always been bullish historically after the oversold signal given on the 4H.
Recently, on the 25th of July, the EUR hit a 2-year low at 1.1102. Obviously, this would also present a strong support level.
Fundamentals:
On the 25th of July, the EUR hit a 2-year low at 1.1102. This is due to the fact that traders expected a more dovish ECB. However, with the ECB instead holding rates, the EUR did end the week at a price higher currently of 1.11281 against the USD. Although the ECB did seem to be more open to a rate cut in the future, hence why initial gains of a rate cut were retraced, I'm not too concerned about this for this trade given that we are capitalizing more on a potential intermediate-term trade given a rate cut catalyst and support.
More importantly, the Fed is set to announce rates on July 31st. I predict a cut of 25 basis points, bringing the target rate to 200-225 basis points compared to currently 225-250. This would weaken the dollar, as lower rates mean a weaker currency. Although markets have to an extent, priced this in, (see the US equity markets rallying to new highs recently) I still think there is room in the 4H timeframe for the EUR to rise against the USD if rates are cut given the ECB's rate hold. We can also see a previous reaction to rate cut sentiment on July 10th and July 11th, where a more dovish Powell testimony sent the EUR rising against the USD (green zone marked).
Currently, stop loss is set to 1.11, below the 2-year low and also as a rounded number. Take profit is set at 1.12505, under the resistance area noticeable at 1.27. This gives us a nice risk to reward of 4.39.
As a whole, this offers us a great intermediate-term trade opportunity, assuming the Fed does indeed cut rates, which at this point seems highly likely (78.6% chance 25BP cut, 21.4% chance 50BP cut on CME FedWatch). If Powell surprises us and doesn't cut rates, obviously don't take the trade as the EUR will without a doubt fall much lower against the USD. With 3 days left before the FOMC meeting, I may not take the trade right now and instead observe price's reaction at the support level, but will definitely enter at least a day or two in advance.
Thanks for reading!
Trade closed: stop reached:
25 BP cut did come as expected but no forward guidance on future rate cuts unfortunately. Onto the next!