Chapter 37 07/19 EURUSD: Go Short at the Highs as the Upward Trend Is Close to Stagnation
Abstract: The consumer price index of the eurozone in June was 5.5%, which was lower than the year-on-year 6.1% in May and continued to hit a new low since January 2022. The core CPI (excluding energy, food, alcohol, and tobacco) was 5.5%, higher than 5.3% in May.
Fundamentals
The overall inflation rate and core inflation rate in the eurozone continue to decline. Data released on Wednesday showed that the inflation rate in the eurozone fell to 5.5% in June, and the core inflation rate rose slightly. This means that the price inflation rate has fallen by half since its peak last autumn. It is expected that the overall inflation will continue to decline in the summer and will drop to around 4.5% next month.
In addition, due to the German cardinal utility, the core inflation rate will remain high, but it should drop to around 3% by December this year, which will pave the way for the European Central Bank (ECB) to turn to doves next year.
At present, ECB officials are eager to accurately convey the policy intention after raising interest rates next week.
According to the insiders, members of the ECB Governing Council believe that explaining the policy direction after the July meeting is their biggest challenge. Officials from all factions insist that the outcome of the September meeting is still uncertain. In this context, their task will be to avoid sending a clear signal of raising interest rates again or suspending interest rates. Such concerns highlight the need for the ECB to be particularly cautious as the most radical austerity action in the history of the eurozone draws to a close.
On the market side, in the short term, we are still uncertain whether the USD will further fall sharply. The momentum is still biased toward the bears, but the downward momentum has begun to weaken. At the same time, after the economic activity in the eurozone slowed down in June, the prospect of further interest rate hikes by the ECB in September is still unclear. Considering the weak economy in the eurozone and the risk of suspending interest rate hikes in September. If the Fed raises interest rates aggressively next week, the market may re-evaluate the exchange rate of the EURUSD.
The EURUSD climbed to its highest level since the spring of 2022 again on Tuesday, but some indicators indicated that it may have been overbought. Although the quantitative indicators continue to point to bullish, the Relative Strength Index and Stochastic Oscillator warn of overbought signals, which should not be ignored.
At the same time, as the U.S. economy seems to be improving, which intensifies the market's expectation for the Fed to raise interest rates, the EUR may face more pressure. Therefore, the recent strong rise of the EURUSD may face an inflection point.
Technical Analysis
The EURUSD rose sharply in the past 10 days, breaking through a series of recent strong resistance levels and hitting a 17-month high of 1.1276 on Tuesday. However, due to the extreme overbought of the EURUSD, it seems difficult for bulls to continue the recent upward trend.
Current momentum indicators suggest that the recent rally has been grossly overdone. Specifically, the MACD not only sits above the 0-axis in sustained divergence but is also at its highest level since January 2023, while the RSI is directionless in the 70 overbought zone.
The previous peak at 1.1094 could become the first line of defense if upside action fails. Below that level, the price could test February's resistance at 1.1032, which could become future support. Further declines could stop at 1.0916.
On the other hand, if the bulls are undaunted by the upside resistance, they may first test the psychological threshold of 1.1300. Breaking through this level, the EURUSD could move up to the November 2021 resistance at 1.1382. Breaking through this range could pave the way for the bulls to further test the February 2022 peak at 1.1494.
Overall, the EURUSD's strong rally has stalled as prices are approaching overbought conditions, while also competing with a key uptrend line connecting the lows since September 2022, a break below which could easily trigger a downside correction. It is recommended to try the path with the least risk.
Trading Recommendations
Trading direction: Short
Entry price: 1.1245
Target price: 1.0916
Stop loss: 1.1430
Deadline: 2023-08-02 23:55:00
Support: 1.1155, 1.1097, 1.1011
Resistance: 1.1276, 1.1371, 1.1396
