This potential bearish reversal on EUR/USD is for you longer-term playas out there…Is the turn lower legit after retesting previous highs?
Longer-term Reversal on EUR/USD?
We’ve got the weekly chart above of EUR/USD, and we can see that the bears have taken control in 2021 after the pair hit multi-year highs just above the 1.2300 handle.
The recent turn in sentiment is likely a reaction to the “rising bond yields” and “inflation fears” themes, driving traders to speculate that the Federal Reserve may reduce stimulus measures sooner that previous though.
And we’ve also got arguments that the actions to extend lockdowns in Europe to control the covid pandemic will likely keep the ECB in stimulus mode for much longer, seemingly bringing euro bears back into the game.
These themes are likely to persist for the next few weeks as we wait to see if Europe can tame the recent rise in covid cases, and if rapid inflation growth in the U.S. / bond yields has reached its limits (the 10-yr U.S. Treasury note yield seems to be topping out after Powell hints of removing support) . If so, this bearish turn in EUR/USD may have legs, and makes this a potential longer-term setup to watch.
In the shorter-term, we’ll likely continue to see choppy price action as traders shift focus back and forth between covid updates, fiscal and monetary policy changes, and bond yields, so for traders with a bearish outlook on EUR/USD, a scale in short entry strategy between 1.1800 – 1.2200 makes sense to build a position and reduce the risk of FOMO and getting it at an unfavorable price.
And when using a stop just above the 1.2400 and targeting the bottom of the range (around 1.0800), you can build a high probability trade for the above scenario with a minimum potential return-on-risk of at least 3:1, with a six to twelve month timeframe.
Of course there are risks to any trade, and with this one, the main themes to watch out for is that a rapid recovery in Europe may bring euro bulls back. And if inflation in the U.S. is only transitory as Powell has suggested many times, Dollar bulls may have a tough time as traders are likely reduce bets of Fed tightening down the road.
What do you guys think? Is the Dollar just getting warmed up for a longer-term rally? Or is this pullback in the EUR/USD rally an opportunity to buy at a better price?
Let me know in the comments below, and as always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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