The Rise and Fall of the Euro - Fundamental Analysis

GlobalMacroTrader

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EURUSD Fundamental Overview (1-6 month)
Ever since the global lock down and pandemic in March 2020 EURUSD started quite a bull run. We saw the EURUSD prices increase from 1.08 all the way to 1.18, this is about a 9% increase in value in around 5 months which is out of the ordinary for EURUSD considering it's quite low volatility in comparison to other less liquid pairs. It's now met with some resistance so we're investigating a little bit on why this might be.

Using the macro currency strength meter I've identified some really interesting divergences in economic data. The Euro over the past month or so has been getting worse even with monetary stimulus from the European Central Bank (ECB). On the flip side the United States data outlook is starting to look more bullish with it gaining points in the last week and continuing to have a positive score overall.
#1 strength meter.png

The main interest is that this week EUR has fallen into the negative region of the strength meter which can signal a potential weakness in the currency or potentially it's over valued. This allows us to filter out the market noise and now focus on EURUSD to see what other data points we can uncover.

Gross Domestic Product (GDP) Differentials
Now that we know to focus on EURUSD we can compare the GDP of each economy to gauge how well they're doing, are they growing or contracting. Interestingly enough Europe hasn't been growing at a great rate in comparison to the United States. Ever since 2008 there's been a negative differential only popping into the positive region a couple times before going back negative. This means currently it's quite deflationary in Europe in comparison to the U.S. so we predict deflation giving us a short bias overall. The change in differential however is at 0.5 meaning it's starting to look a little bit better but not with great confidence.
#2 GDP differentials.png


Commitment of Traders Report - COT Report Forex Analysis
Now that we kind of have a rough fundamental outlook of EURUSD of being short we want to see what the market sentiment is positioned like and more specifically what are the Hedge funds thinking of EURUSD!
#3 EUR COT.png


Taking a look at the EUR COT positioning of hedge funds we can see in the pink line it's currently hovering above 0 which means hedge funds have a positive open interest and they have more long positions than short. This isn't 100% great for our short idea but if we look closely at the data we can see that those positions have been closing at it's starting to steer downwards. Could this mean EUR shorts start coming through in the next few weeks? Let's keep an eye on it and make sure we're positioned right moving forwards.

#4 USD COT.png


What about the USD positions are hedge funds buying it? The answer is yes they are. You can see the pink line popped above 0 this week meaning hedge funds have started to buy the U.S. Dollar this week. It could mean the start of a big trend if they continue to buy the safe haven currency. Currently based on market sentiment we're a bit neutral so we'll see what price is also saying to see if we can start shorting the EURUSD.

If you're interested in reading more about how to create the COT indicator above I've made a free tutorial here.

EURUSD Price Chart Overview
#4 weekly price.png


There's been some very very interesting points on the weekly levels for EURUSD. You can just see the downwards trajectory it's been on over the past 10 years. This downtrend we want to get in on as prices come to levels in which are over valued due to the events that have been happening around the world. Currently prices are hovering between 1.15 and 1.2 and hitting a major level of resistance which saw price drop below 1.1 in the past. Now we really need to see if sellers really come in by confirming sellers. We'll take a look into the daily time frames to see whether they do or not.

#6 daily price.png

On the daily level we've been on quite the bull run and it's honestly quite difficult to be selling into this right now. A major point of discussion is a potential second wave of covid hitting major European countries like France. If this continues to hit consumer and business confidence we'll see EUR take a major downturn especially with winter coming up and everyone having similar flu like symptoms. I've outlined on the daily chart that the lows at 1.17 need to be broken with sellers showing significant pressure here. If price can't break this we need to be patient in the next weeks to see if it does. We're close so keep an eye if it does I'd expect price to make a pullback like outlined and potentially get in there for a nice downwards trending movement.

Downwards trend looks very likely in the coming month so keep your eyes peeled for it.

Feel free to read more on the blog.
 
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