EURUSD In-depth Outlook: Fundamentals Are in Favor of Euro

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For the past four months, the Euro has been trading within a range of 1.09 – 1.14 with no clear break above or below these solid levels, leading technical indicators to show flat lines on the longer term view, which makes it more difficult to predict the upcoming moves from a technical analysis point of view.

What To Do?

Merging between fundamental and technical analysis is the short answer. However, it is not as easy as it sounds. It is definitely possible, but it takes more time than the usual analysis. However, it is worth the time because it helps us catch the possible upcoming move.

Traders’ Sentiment

First, let us look at the latest traders’ sentiment. This can be done through the weekly Commitment of Traders Report, published by the CFTC in the US. The Commitments of Traders is a report issued by the Commodity Futures Trading Commission, enumerating the holdings of participants in various futures markets. These futures markets are places to buy or sell anything from grains, cattle, financial instruments, metals, petroleum, etc. The Commodity Futures Trading Commission (CFTC) releases a report every Friday at 3:30 ET, detailing the commitments of traders on the prior Tuesday. The weekly Commitments of Traders report is sometimes abbreviated as “CoT” or “COT.”

EUR COT Chart

The latest COT report showed that short positions had decreased notably, while long positions have increased very slightly, remaining within a tight range since January of this year. However, net positions remain negative, which means that short sellers remain in control. This keeps the long term bearish outlook unchanged for the time being, and it is of course, due to the ECB’s easy policy (QE).

EUR COT

US Dollar COT Chart

On the other side, by looking at the US Dollar COT data, we can see that traders are not interested in buying US Dollars anymore. As shown on the chart, in comparison to January of last year, long positions have decreased significantly. At the same time, shorts have increased gradually, leading the net positions to decline and approach the zero barrier.

USD COT

Central Banks’ Policies

  • ECB: The ECB is continuing with its current QE, which is considered a negative factor for the Euro. However, this is already priced in as the Euro has declined from almost 1.40 to 1.046 in 2015. The positive factor for the Euro nowadays is that according to the latest ECB decision, the bank is not willing to extend its QE beyond March of next year. This is why the Euro is stabilizing.
  • The Fed: the Federal Reserve delayed raising rates many times this year, keeping the US Dollar under some pressure throughout the year. With no signs of a rate hike anytime soon or before the end of the year, the US Dollar may decline further in the coming weeks and months.

Weekly Chart

The Weekly chart is showing the tight range that the Euro has been trading in for almost four months. However, the pair is now trading within a triangle which should be watched very carefully. A break of this pattern would be the key for the upcoming move. The lower band of the triangle stands at 1.0990, while the upper line stands around 1.1550s. As long as the pair stays within this range, the outlook will remain neutral. A break above the 1.1550 would change the outlook to strongly bullish, while a break through the lower band would turn the estimates to bearish again.

EURUSD Weekly

Conclusion

The technical outlook is neutral on the medium term (Weekly and Monthly). However, fundamentals are in favor of the Euro rather than the US Dollar, so traders should watch the Euro carefully in the next few weeks. Central bank policies, including the ECB and the Fed, will be based on the next few weeks’ figures and economic developments. Therefore, traders are advised to be patient with their decisions.

 

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