EURUSD: To Take The High Road Or The Low Road?
Much of Europe might have been celebrating a public holiday on Tuesday but the currency market never really takes a break. Downside sentiment dominated in EURUSD on Tueaday and the pair broke down through barrier options at 1.2050, through its 200 day moving average at 1.2015 and then took out another layer of forex option barriers at 1.20 before the selling pressure finally eased. Asia on Wednesday traded the pair sideways. And this was all before Wednesday’s Federal Reserve policy decision where the markets expect no hike in US interest rates but are contemplating the US central bank exhibiting language that points to further rate rises. The market is already pricing in a June hike as a near certainty. Against this backdrop, traders will have to consider whether the prior fall in euro/dollar already incorporates everything the Fed might say on Wednesday and whether the May Day price action represents “the picking of low hanging fruit” as traders successfully targeted two levels (1.2050 & 1.2000) at which it was expected there would be strong barrier interests to be knocked out. There’s also the issue of whether the market was primarily selling euros or buying US dollars. The accompanying price action in EURJPY and EURGBP might suggest the former. If that was the case, might that mean the USD might be more receptive to a “hawkish hold” from the Fed?
Traders will also need to make a judgement on whether the sizeable long EURUSD position evidenced in last Friday’s CFTC data has been materially reduced. Given its scale, that might seem unlikely even allowing for the recent price action in EURUSD. Traders will make their own judgements and some will undoubtedly feel that, with the May Day sell off, EURUSD might now be a bargain. Others will conclude that a stale long euro position still hangs over the market and that therefore EURUSD might be a sell-on-the-rally. It’s a tricky call but perhaps the key question traders have to ask is this: if the market was selling euros (as opposed to buying US dollars) in recent sessions, has something changed to make the mass of traders want to opt for renewed euro buying (or US dollar selling)? How a trader answers wil be critical to formulating a trading strategy on EURUSD into the Fed meeting.
Written by Neal Kimberley, External Currency Analyst.