EUR/USD Long-Term Outlook – Do We Have a Major Bottom in Play?
Eric Furstenberg • 4 min read
The European Union has been facing multiple political and financial challenges lately. The first major difficulty was the Greek financial crisis. Other problems include the Deutsche Bank crisis, and of course, the Brexit.
Besides these hurdles, there are other European countries who are increasingly growing more and more eurosceptic. These countries include Germany, France, Italy, Sweden, and the Netherlands.
The recent relief bounce in the euro when Emmanuel Macron won the first round of the French presidential election, bears witness to how sensitive the euro is to potential EU member exits from the Eurozone.
Despite all the challenges the Eurozone, and consequently, the euro, has faced during the last few years, the euro has been standing its ground like a real hero.
By the way, the EUR/USD is a really important instrument to us and plays an integral role in our profitable forex signals service. If you’d like to learn more about how to trade the EUR/USD, you can simply follow this link: Trading the EUR/USD Currency Pair – A Beginner’s Guide.
For the last two years, the U.S. dollar has been unable to gain lasting ground against the euro. At the moment, the EUR/USD is a worthy 800 pips above the important low which was set earlier this year on the 3rd of January. Let’s take a look at a daily chart of the world’s most liquid currency pair:
EUR/USD Daily Chart
Many investors consider a financial instrument to be in an uptrend when the price is above the 200-day moving average.
In the chart above, you can see that the price gapped right through the 200-MA on the Monday following Macron’s victory in the first round of the French election. Since then, the 200-MA has been a reliable dynamic level of support.
Do you notice how the price has successfully built a base just above the 200-MA from where it has now managed to push aggressively higher? And do you notice how incredibly steep the gradient is of this phenomenal incline?
If you examine the last four candles in this chart and compare it to the rest of the bullish waves on the same chart, you’ll notice an impressive acceleration of the existing uptrend. It’s like the bulls have suddenly realized that they are winning the battle.
It’s just like when a boxer starts getting the upper hand over his opponent: immediately he puts in more focus and energy into every punch in order to secure the victory.
It will be interesting to see what happens with the EUR/USD in the next few days, especially with the persistent dollar weakness which has been unfolding since the beginning of this year. Let’s look at the U.S. dollar index:
U.S. Dollar Index Daily Chart
This dollar index is an equal weighted composite of four major currencies against the U.S. dollar. They are the Australian dollar, euro, pound, and the Japanese yen.
The dollar bears are celebrating today, that’s for sure. In this chart, we can see that this index has broken through the recent support today. A new low has been formed.
This is just one more ‘lower low’ of a series of lower lows which have been forming since January this year. The price also closed firmly below the 200-day moving average today, which is a confirmation to many investors that the dollar is now undoubtedly in a downtrend.
If we consider the substantial dollar weakness and the incredible euro strength, the possibility that an important bottom has been set on the EUR/USD seems even more tangible. I’m not talking about a short-term bottom, however. Let’s take a step back and examine the bigger picture on a weekly chart:
EUR/USD Weekly Chart
The mighty 1.05000 level has been a rock solid level of support for more than two years now. By the way, the total turnover on the EUR/USD in this time (roughly 2 years) amounts to about $610 trillion. Amazing, isn’t it?
To get back to the technicals, we need to be aware of this important level of support which has been tougher than an African honey badger. You see, sometimes a support level becomes weaker and weaker when the bears repeatedly attack it.
However, when a support level forms over a really long period of time like it has in this instance, it can become an impenetrable barrier and a solid base from where the bulls can launch a powerful attack.
On the other hand, there is a stiff level of resistance at the top of this range which the bulls will need to overcome before they can take out the big 1.20000 mark.
One thing to keep in mind is that a further incline in the EUR/USD exchange rate could have a powerful short-squeeze effect on investors’ short positions if the price moved past 1.17000.
At one stage, the ‘whole world’ held short positions on the EUR/USD. Although this tremendous short exposure has been unwound to a certain degree by now, there is still a lot of it left in the market.
Let’s see what this pair does in the next couple of months. And if we get a consistent push higher over the course of the next year or two, there should be numerous opportunities to build up a considerable aggregated long position on this pair.
In closing, it’s worth mentioning that the EUR/USD isn’t the only euro pair that’s been moving strongly higher. There have been a couple of impressive bounces in some of these pairs, which include the EUR/CAD, EUR/AUD, and the EUR/NZD.
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Have an excellent week in the markets… good luck with your trading!