At the beginning of the year, the Euro kicked off the year lower and posted the lowest level since 2003 around 1.04.
Back then, investment banks were very bearish on the Euro, estimating a sharp decline well below the parity level with the US Dollar.
Some banks downgraded their estimates multiple times, some were estimating 0.95, and the majority of the banks were predicting a notable decline all the way down to 0.85 and even 0.80.
Now if you look at the EURUSD price, it’s 1.1860’s. It has been rising since the investment banks downgraded their estimates to below the parity level.
What Went Wrong?
Investment banks were right about downgrading their estimates at the beginning of the year, as the economic activities were very negative and the light at the end of the tunnel was not even close.
At the same time, the ECB and the investment banks were tricked with the risk of deflation, despite the fact that deflation had occurred for only a few months before inflation started to bounce sharply.
The ECB also noted that inflation had risen much faster than they thought, which pushed them to start easing their QE program, side by side with the notable improvement of the economic activities.
Moreover, on the other side of the world, the US economy was showing signs of improvement. Yet, it did not last for long. In addition, electing Donald Trump was not good news for the Fed and/or the US Dollar, as his economic plans need a weaker US Dollar.
The Fed was supposed to raise the rates 4 times last year, but ended up with one, while it estimated 4 hikes this year, but managed to hike it twice. As the Fed continues to be reluctant, traders continued to ease their estimates for further rate hikes.
Retail Traders Betting On Further Gains
The latest commitment of traders report by the CFTC, traders are still betting on further gains ahead, especially that the Non-Commercial Longs has spiked to a record of 200K contract last week.
At the same time, Shorts at the lowest level since 2014, after they were at the highest level at the beginning of this year. So far, Shorts are down by more than 60%.
Where Do We Go From Here
For the time being, it’s all about the ECB and the economic activities. So far, the economic figures are solid, and growth is steady, but we are not there yet.
However, the ECB remains very clear that the QE will be reduced later this year, and this is one of the reasons why the Euro is rising, traders are pricing in less QE and accommodative monetary policy.
With inflation rising, the ECB might even think about raising the deposit rate and might increase the pace of tapering in the coming meetings.
As long as the economic activities keep on improving, traders should not be thinking about the parity level anymore.
Technical Retracement Ahead?
The Euro is now at the highest level since January of 2015. The technical indicators are heavily overbought on the entire time frames, which support the idea of a short term retracement.
However, any downside retracement is likely to be limited above the recent breakout around 1.15.
On the upside view, the Euro tested 1.1860’s earlier this morning and remains around that level, which keeps the possibility for another rally.
A break of today’s highs might lead to a fast rally, especially that there is no significant resistance between 1.1860’s and 1.20. Meaning, that testing 1.20 barrier might be a matter of time, especially if the US Jobs Report on Friday comes with a disappointment.