Euro – Pullback or Top?

Euro – Pullback or Top?

Euro – Pullback or Top?

The focus of the currency market will turn to the euro next week. The German IFO and ZEW surveys are scheduled for release along with Eurozone PMIs. When the European Central Bank last met, President Draghi said he doesn’t see the need for a further reduction in interest rates. Next week’s economic reports will go a long way in shaping market expectations for additional easing. If the numbers are strong, EUR/USD will extend its rise because the data will validate a steady stance in future meetings. However if the data weak, the overstretched euro could slip one to two cents. With that in mind we are weary of picking a top in euro or any of the major currencies because they are still trading near multi-year lows. EUR/USD is up 8 cents from its 2015 low but down 36 cents from its 5-year high. So from a historical price perspective, there’s plenty of room for it to rise. When trends get going in the forex market, it requires a major unanticipated catalyst to alter the moves and unless commodity prices suddenly crash or the Bank of Japan intervenes in a very big way, there’s nothing significant enough on next week’s calendar to spark a turn in market sentiment. Volatility is also very low with the VIX falling to its weakest levels since November -- low volatility is positive for risk appetite.

Technically after the strong gains enjoyed between Tuesday and Thursday, the EUR/USD retraced to end the day lower on Friday. For the time being the magnitude of the correction represents nothing more than a pullback within a broader uptrend as long as EUR/USD holds above its former breakout point of 1.1050. This week’s rally puts the 2016 high of 1.1376 in sight. If that level is tested and broken the next stop should be 1.15.

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