Euro – Should Fail Near 1.12

EUR/USD is the only trade that we are in now – so lets take a look at where things stand.

It was a good week for the euro, which like many other major currencies bounced off its Brexit lows. However now that the Bank of England opened the conversation about more easing the European Central Bank could be next. On Thursday, Bloomberg reported that the ECB is considering loosening its QE rules. This sent EUR/USD sharply lower all of the losses were recovered after an ECB press officer denied the report. But we can’t help but point out that there’s merit to this argument as the pool of debt that the ECB is eligible to buy shrinks by the day. It also puts the thought of easing into everyone’s minds and going forward, market participants will be looking for dovish comments from the ECB to validate a short trade. Any denials will be viewed with skepticism. Data has been mostly better than expected but that matters little when they have yet to capture Brexit risks. Meanwhile, next week’s U.S. economic reports should continue to lift the dollar. Last month’s non-farm payrolls report was very weak and a significant rebound in June is expected. The uptick in manufacturing activity also bodes well for the trade balance and service sector PMI report.

Technically, we believe that the rally in EUR/USD will lose momentum around 1.12, which was a significant support turned resistance level between April and mid June. It is also where the 100-day SMA and 61.8% Fibonacci retracement of the 2000 to 2008 rally converge. The 200-day SMA near 1.11 is providing some near term support but there have also been a number of daily lows below the technical indicator. The more meaningful support level is near 1.10.