EUR/USD is back up towards the 1.1000 level currently
After a solid recovery off the lows just under 1.0800, the pair is now back up towards the 1.1000 level as the euro braves its way past the risk-off mood in the market.
One can point to a few reasons for the gains in the currency pair recently but I would argue that it hardly matters at this stage:
- Month-end flows in EUR/GBP being supportive of the single currency.
- Unwind in short euro positions amid the risk-off environment as the euro has been used as a funding currency (alternative to the yen).
- Rotation out of USD-denominated assets as stocks tumble and Treasury yields sink to record lows, also heightened fears of virus spreading in the country.
- Some whispers of possible German stimulus to combat any economic slowdown that may happen as a result of a more widespread virus outbreak.
You can throw the dart and hit any on of those reasons and you won't be judged to be mistaken in my view. But regardless of those reasons, I would say that the real test from a technical perspective for EUR/USD has just begun.
Price is now challenging a key psychological level at 1.1000 with the 50.0 retracement level of the swing move lower this year is also seen nearby at 1.1009.
Add to the fact that there is also a key trendline resistance at 1.1003 and there you have a confluence of key resistance levels that buyers need to try and break above.
Beyond that, there is also further resistance from the key daily moving averages at 1.1055 and 1.1099 currently. Those will be added pressure points to limit gains as sellers would look to lean on those levels to get "back in the game".
The euro has done well to recover from its slump to start the year but more work needs to be done if buyers want to chase any significant upside back towards 1.1200 and above.
From a fundamental perspective, the market is now pricing in three Fed rate cuts this year and that is quite a stretch in my view. I'm not too sure how much weaker that may weigh on the dollar but on the flip side, the euro's status as a funding currency is even more unknown. How much of the unwinding is there still left to go if the risk aversion continues?
In that lieu, the technical picture above will give us the answer but I would argue that the risk-reward remains more favourable to sell closer towards the key resistance levels above and more so towards the key daily moving averages.
