The Dollar is back in favour once again as investors begin to ponder the interest rate differentials now building between the US unit and the Euro. There now appears to be signs of the US Fed preparing the ground for an asset purchase taper, as the economic rebound post-pandemic grows in strength, whereas the Eurozone is still mired in recession.
Two-year yield spreads are now close to 1%, giving investors little incentive to buy the Euro.
This can be seen in speculative positioning, at present at levels similar to those of June 2020, when the Euro was trading at €1.125.
It appears that traders are convinced that US interest rates will rise, boosting the Dollar versus the Euro. Both leverage traders (Hedge funds) and the Large traders are very short the Euro.
There is a lot of fuel for a rally should shorts get nervous.
But will the Fed actually taper? It doesn’t appear that the over-indebted US economy is much better equipped to deal with higher rates than any other region and there are already signs of a slowdown in US growth, as debt ceiling squabbles and high oil prices take their toll on sentiment -indeed the next major news might concern stagnation (at best) rather than growth.
As we have seen many times, a market fall often concentrates Central Bankers minds, as in 2018, when the plan to “normalise” interest rates was ditched in the face of a stock market fall of 20% at the low point.
The Dow is only c.6% off the highs thus far, but when stock markets fall, they tend to do so rapidly.
This chart shows where market pressure points currently lie. Large open interest positions (at 1.16 and 1.15) are often defended aggressively in the run-up to options expiries (in this case 8/10/21), and we could expect to see a rebound from around current levels (€1.158 as of 1/10/21).
There is chart support around €1.1497 (see below) and a 50% Fibonacci retracement support lies at €1.1493, so stop losses should be placed below €1.144 to be relatively secure, (though this should be moved up to breakeven at the first available opportunity).
The major resistance point above is around €1.194, giving a risk/reward ratio of close to 3:1.
Assuming the recent bout of equity turbulence continues for a few days, an opportunity to buy the Euro around 1.157 looks very likely to present itself.