Picking up EUR dips on base-building potential


The chances are that EUR is in the later stage of a decline
Chief Investment Office25 Sep 2019
Photo credit: AFP Photo


Chart 1 used with permission from Bloomberg Finance LP, as of 25 September 2019.

 

The European Central Bank’s (ECB) decision on 12 September to deliver a substantial stimulus package – a cut to the deposit rate, enhanced forward guidance, another round of quantitative easing, and very favourable TLTRO (targeted longer-term refinancing operations) loans – has not exactly crashed the EUR. Ironically, still frosty European fundamentals data, in particular headwinds from Germany, invites speculation that fiscal policy enhancements would come into play. That limits EUR’s downside; Chart 1 shows the importance of 1.0927 as a strong interim support level.

But take a step back and consider the fact that the current price configuration actually began with December 2016’s lows around 1.0341. There, EUR pitched a five-legged rally 1-2-3-4-5 to seize a 1.2555 peak in February 2018. After completing the move, EUR posted a corrective three-legged ABC pattern to complete the entire price structure. The chances are that EUR is in a later stage of decline, which is close to finishing, as shown within the ending diagonal pattern (in green).

This would mean EUR is looking to build a base.

The first strong support stands at the 1.0927-1.0908 zone, followed by 1.0864, the 76.4% Fibonacci support of the 1.0341-1.2550 range extremes. Further support comes in at the 1.0815 mark, which is the 78.6% Fibonacci retracement of the 2017-18 rally.

To sum up, we look to build a tactical long on a dip at 1.0930 with an invalidation point of 1.0805 (under the critical support of 1.0815). While this is still early days, if EUR breaks to the upside via 1.1109 and pertinently 1.1250, this sets up a bear trap which should not be ignored, given this would end EUR’s decline that began from 1.2555 in February 2018.

 

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