As you can see on the chart below, EUR/USD is sort of lollygagging around a mid-channel support on the daily time frame. Since I love major dollar pairs and trends, this one is hitting all the right notes for me.
I would love to enter a short trade around the 1.0650 – 1.0700 area, which is not only near last week’s high and this week’s top weekly ATR that we had marked earlier this week, but is also near the falling channel AND 100 SMA resistance on the chart. Talk about the stars lining up!
Fundamentally, it makes sense to buy the dollar against the euro. Aside from a positive interest rate differential, we’re also dealing with central banks who are driving in opposite directions.
Word around the hood is that markets are pricing in a cool 100% odds that the Fed would raise its rates this month. Meanwhile, Forex Gump noted that the ECB will likely sit on its hands and avoid rocking the boat until the Dutch and French elections are over.
The perfect scenario for this setup is when the ECB starts to prepare the markets for more tapering after the elections. Any shift from its dovish tone last month could boost the euro higher, at least enough to hit the channel resistance area that we’re watching. Then, if the NFP report does surprise to the upside as Forex Gump suggests, then we could see the dollar dominate its major counterparts and maybe extend EUR/USD’s downtrend.
But nothing is perfect and predictable in forex trading. For one thing, Draghi and his friends could continue to shrug off upticks in inflation in favor of providing more monetary stimulus. And then there’s the NFP report, which could also inspire a round of buy-the-rumor, sell-the-news scenario given how aggressive traders have been towards the dollar in the past couple of days.
For now, I’m crossing my fingers to see if any of the scenarios I’ve mentioned will play out. I’m also thinking of entering at a break below last week’s lows if the pair resumes its downtrend without retracing higher.
What do you think? Will EUR/USD extend its downtrend in the next couple of weeks?