The FOMC could make like harder for EURUSD above 1.34
The EUR has been one of the top three performers versus the dollar in the G10 over the last month. It has traded in an uptrend ever since Fed chairman Ben Bernanke announced that the Fed could taper asset purchases during his testimony to Congress last month. Ironically, the prospect of an end to QE3 has been more positive for the euro than it has been for the USD.
So how far can the EUR uptrend go? The fundamentals for a strengthening single currency are mixed: growth is picking up from a low level but it is still too early to say that the Eurozone economy is in recovery mode. However, on the other hand, the ECB has not embarked on QE and its balance sheet has continued to shrink in 2013. Even if the Fed does start to taper asset purchases its balance sheet will still be expanding, which should be EURUSD positive. However, we expect the era of easy gains in EURUSD are over.
Some dollar weakness post the FOMC meeting might be expected because a lot of “tapering” has already been priced in by the market. Thus, we could see EURUSD strengthen further in the short term. However, we hope to see any rallies in EURUSD start to fade because of:
- EURUSD is close to overbought territory and both the hourly and daily RSI’S are close to stretched levels.
- The base of the monthly Ichimoku cloud comes in at 1.3650; this could act as a fairly sticky resistance zone.
- Investors may get nervous if EURUSD gets close to 1.3700 – the high from February. Back then ECB President Draghi expressed his displeasure with the level of the euro, which caused EURUSD to drop 900 points in the next 2 months….
So, from a technical and fundamental perspective I think that EURUSD could be a sell on any rallies. 1.3650 may act as a selling zone, with a target of 1.3220, the low from 7th June, initially. A stop could be fairly tight, around 1.3730, since if the market gets above this level then it would negate this market idea.
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