The EUR/USD exchange rate is stubbornly clinging on to levels around the 1.0550 area and not falling as deep as would be expected from widening EU/US yield spreads.
Even the threat of political risk has not been able to unseat the Euro, as Euro downside was limited even after former French PM Juppe explained he would not be running for presidency.
The currency’s resilience could be, “partly due to increased speculative short positioning,” according to Credit Agricole.
Speculative FX positioning showed Euro short positioning rose to multi-week extremes.
As such the pair is due a snap back, arguing for a bullish reprisal.
In addition, CA see a compelling fundamental reason for their contrarian stance.
They expect the ECB to consider changing its forward guidance to support the view that the lower bound in rates has been reached, which should put a bottom in the Euro.
They also argue that Friday’s US Labour report is unlikely to push up Fed rate hike bets any higher (March is already almost 100% priced in), and as such the Dollar has no scope left to rally higher by much.
Their reasoning leads CA to conclude that they cannot, “exclude better levels closer to 1.07.
The bullish short-term forecast chimes rather elegantly with our own forecasts for the currency included in our week ahead assessment.
The weekly chart is showing a tweezer bottom and a bearish engulfing, with bullish implications, however, the daily chart has now also set up for more upside further compounding the flashing bullish indicators.
On the daily chart, we see that Friday’s strong up move pierced the recent mini-downtrend line.
Add to this the fact the pair has pulled back to the trend-line in a ‘return’ move which often happens just after a break, when the exchange rate falls back to ‘air-kiss’ the trendline goodbye, and you have an awesome set-up for going long on Wednesday.
The next target is likely to be the monthly pivot (PP) situated at 1.0648 as at that level bulls will meet a potentially strong counterattack from bear’s seeking to fade the trend.