Yesterday, the euro rallied on both short covering on bearish euro bets and a strong German IFO Business climate reading. The IFO survey for July printed a 108.0 reading, better than the 107.6 forecast. If data continues to improve from Europe’s largest economy, we could see the euro continue to tentatively higher.
Price action on the EUR/USD daily chart shows the double-top pattern that formed in the middle of June has triggered a major slide that finally found support last week with the 1.08 handle. The recent rebound has strengthened and surged above the 100-day SMA and is attempting to stabilize above the 50-day SMA. If we do see price climb over the 1.12 zone, we could see the short squeeze support a move higher towards 1.1325. Major resistance will come from the 200-day SMA, which is currently trading around the 1.1485 level.
While the longer-term outlook for this currency pair is for fresh 2015 lows and a potential fall to the 1.02 area, we could see price trade range-bound from 1.08 – 1.14 over the next couple of months. With the Fed possibly hiking rates this September, slumping oil prices and broader weakness with commodity prices may continue to dampen inflation and soften expectations on the Fed’s normalization path.
If the longer-term bearish resumes and price recaptures the 100-day SMA, which is trading around the 1.10 handle, weakness may target the 1.0750 region.
The trade: Sell EUR/USD at 1.1225, with a stop loss at 1.1325 and take profit at 1.0925. The risk/reward ratio is 1:3
Edward J. Moya
Senior Market Strategist
WorldWideMarkets Online Trading
