EUR/USD in a Technical Consolidation, ready for a Second Rally?| KOL Forex Analysis•Stelian Olar

EUR/USD has repeatedly fallen back from the 1.1900 area, after trying to rally to higher levels. But, the pair hasn't given back much on a quarterly basis, even after the recent sharp pullback in the US dollar - after FOMC minutes triggered more concerns about the US job-growth and a less dovish policy than many traders anticipated.

When we look at the EUR/USD from a multi-decade perspective, the pair has much upside potential above the 1.1600 area - a key resistance formed by the line joining yearly highs in 2008 and 2014, as well as touching 2018 highs.

Also, Bloomberg report suggests the hedge funds and institutional buyers are adding to their long bets anticipating a move beyond 1.19 to 1.2500 - 2018 high.

Helping the strength in the EUR/USD will be the hedging requirements from dollar investors who sense more trouble ahead after the latest US job claim numbers, which unexpectedly edged up above a million. The weak data has checked the US dollar bounce post the FOMC disappointment for pro-risk currencies.

· US Dollar and the Fed

The dollar has declined in value since the Fed started its expansionary approach to revive a coronavirus-stricken economy.

Less favorable jobless claims and worries about business confidence means the central bank has to spend more to revive the economy. Such a dovish approach is fundamentally a bearish act for the dollar - as the funding for the stimulus is by selling more and more Treasury notes and bonds, affecting their yield and the greenback.

Strengthening of the euro at the expense of the US dollar might also reshuffle the pecking order in the world currency market, which considered the dollar as a safe-haven along with Japanese Yen and Swiss Franc.

· ECB Intervention

If the euro attracts more fund flows away from the dollar, ECB might have difficulty in meeting its inflation target. Chances of ECB intervention means traders might consider a move beyond 2008 high to be of less probability.

The ECB July meeting minutes are in favor of the EUR/USD bullish sentiments as 1.35 trillion-euro quantitative easing program has less support for its full utilization; this suggests ECB actions will have less euro value dilution in the near future.

· Other Technical Readings

If we look at the other side of the story, bears will point out the continuous fall of the pair for the last two decades as a strong reason to be not optimistic on the euro. The 2008 high of 1.5950 seems far away from the pair's current price level. The highest EUR/USD price in 2008 starts a resistance line passing through 1.3800 in 2014 September and January 2018 level of 1.2500. This declining price trend is bearish, and the recent months' strength wouldn't deter a long-term EUR/USD bear.

Also, even though institutions are bullish on the euro; the Japanese yen and the Swiss franc are enjoying much higher demand as a dollar hedge according to Bloomberg data.

In summary, if the EUR/USD breaks above 1.19 convincingly then 1.2500 will be in play. It also means a decisive move beyond a 22-year resistance line. A sharp rally is in the cards in such a scenario. And bears will have to break 1.1600 convincingly to allow the pair to renew its multi-year bearishness.

Thank you for reading!

[About The Author]

With more than 13 years trading experience, Stelian Olar is a highly experienced financial market analyst, responsible for disseminating the latest fundamental and macro news in the Forex space and other asset classes.

Stelian is a versatile currency analyst with an in-depth knowledge of how the markets operate at a micro-level. He combines with success both the science of technical analysis and the practice of fundamental analysis to forecast future market trends.

His expertise was shared with several publications in the retail space and works as a contributor for Currency Live.

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