Despite accusations (made by yours truly unfortunately) that EUR/USD underlying sentiment may be turning bearish, prices managed to break the 1.35 resistance, hitting above 1.354 during early US session. Bullish momentum did fizzle out as the US session continued but prices stayed above 1.35, suggesting that bullish momentum is certainly not over, and the earlier assertions that bears may be taking over soon are unfounded.
The reason for the rally in EUR/USD may not be fundamentally based, as there wasn’t any news announcement that could have inspired a stronger EUR. The only major news announcement (Euro-Zone Trade Balance and Current Account were not exactly bullish). Furthermore, the break of 1.35 happened during Asian session, suggesting that the subsequent strong rally during European session may simply be inspired by breakout bullish pressure.
On the other hand, there were good fundamental reasons for USD to strengthen during US hours. Net Long-Term TIC flow grew by $25.5B in September, showing that foreigners are trusting in long-term US economic growth/health. A net inflow of funds into US is bullish for USD in itself, but in this case, this endorsement of long-term economic growth by foreign investors is yet one more reason for Fed to consider tapering QE, resulting in EUR/USD pushing lower.
Currently, from a technical perspective, price should be heading lower towards Channel Bottom, but looking at Stochastic curve which is pointing higher, a case that we are amidst a bullish cycle can be made as we’ve seen similar Stoch Trough on last Thursday. Hence, a move towards Channel Top cannot be ruled out.
Daily Chart is bullish with the clearing of 1.35, opening up a potential move towards the underside of the rising trendline. However, Stochastic tells us that bullish momentum is already hitting Overbought region, suggesting that current bullish momentum may not be able to last too much further.
However, fundamentals do not look upon this bullish EUR/USD kindly. Growth in Euro-Zone remains weak, and much of the recovery effort in Euro-Zone has been attributed to Germany alone. Structural issues in Italy, Spain, and Portugal remains, while other peripheral EU nations are doing much worst. Hence, a bullish EUR narrative hardly sound convincing. On the other hand, we have USD that is growing from strength to strength due to speculation that Fed will taper in early 2014 if not December. Even if Fed doesn’t taper, US stocks is on track for strong growth in 2014 (doesn’t matter even if it’s speculative). Hence, we will continue to see influx of foreign funds into US (as reflected by the TIC numbers) which will drive USD higher and hence EUR/USD in the long run.
Therefore, the same word of caution remains – participate in the EUR/USD bull run if you run, but be aware that things can reverse spectacularly once Euro-Zone woes come back into the focus.
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