EURUSD – Gains Pared After Monster Short Squeeze

It’s been a turbulent 24 hours for the dollar after the Federal Reserve offered an unexpectedly dovish view of the economy, revising down growth and inflation forecasts. Fed members also gave their forecasts for interest rates which pointed to a more gradual pace of hikes than in December.

The euro rallied more than 4% against the dollar following the release of these economic projections in two waves, one shortly after the release and another after the press conference following a brief period of consolidation. It ran into resistance around 1.1050 which was noted in yesterday’s EURUSD piece as being a key resistance level as both the descending trend line and 61.8 fib level intersected previous support and resistance.

This morning, the euro has pared much of yesterday’s gains reflecting the fact that the initial weakness was overdone and may have been exacerbated by stops being triggered and shorts being covered, otherwise known as a short squeeze. In this case, it was the mother of all short squeezes. The historical positions ratio tool, available on the fx labs section of the site, shows what impact the short squeeze had on traders positions as the net percentage of shorts fell from almost 29.12% to 13.82%. The short trade went from crowded to offering value once again.

While the price appears to have stabilised around 106.50, the charts would suggest that today’s decline isn’t over, much like yesterday, we’re just seeing a consolidation. This is shown by the possible flag formation that we can see on the 30 minute chart below. I say “possible” because the upper bound of the flag is not technically complete because it lacks the third touch that would confirm the upper trend line.

This consolidation period has allowed the pair to move into a neutral trend, having been oversold for much of the morning. If this is in fact a flag, based on the size of the pole, a break below could prompt a move back towards 104.70 which closely coincides with last week’s lows.

It should be noted that the pair has consolidated just above the 20 and 50-period simple moving averages (SMAs) which is unlikely to be a coincidence. Both of these are currently providing good support and could make a break below that much more aggressive.

Following all that volatility, our traders are now 55.67% short, much less than we saw previously. This is not unusual given the amount of volatility we’ve just experienced which can bring uncertainty in the outlook. If we see some key levels broken it may drive some bias in the pair.

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