EUR/USD – Is This Breakout for Real?

EUR/USD – Is This Breakout for Real?

The EUR/USD rose more than 3% today in one of the biggest short squeezes in years as Mario Draghi under delivered and the pair which was grossly oversold popped more than 300 points higher. There is no doubt that today’s carnage caused a lot of pain to late EUR/USD shorts but the key question is whether the pair has set a long term bottom.

We don’t think so. The underlying dynamics that send the euro plunging remain in place. The ECB will continue to exert its downward pressure on short term rates as it maintains the aggressive QE program in the face of disinlaftionary pressure that still persist in the region.

Meanwhile the Fed despite the hick ups in US economic data will likely hike rate in December and the spread between USTs and Bunds is unlikely to narrow much providing a natural boost to the dollar. Only a delay in the Fed hike and a decline in the benchmark 10 year rates towards the 2% mark could upend the dollar trade and push the EUR/USD pair higher. Meanwhile the 1.1000-1.1100 level looks to cap the move for now.

Chart Of The Day

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