I have been bearish on the euro for some time now and I think justifiably so. War on European soil is a massive disruption to the markets due to the uncertainty that comes with such actions. But we have also seen rising inflation and the ECB’s unwillingness to move in the same direction as other central banks with a tightening of monetary policy. The BOJ is probably the most accommodative bank, so ECB has a friend there and maybe the euro against the yen cancels out in terms of monetary policy divergence.
Yesterday’s bounce tested the resistance level of 128.688 and I was expecting further declines today to keep the trend continuing to the downside. The price action this morning however suggests that the market may be preparing to reduce its short position and go higher to find some more traders willing to sell.
Starting with the daily chart a move above yesterday’s high would confirm my suspicion that we are heading back into the range, possibly to the 130.20 level to test 50% of the down move from the 133.15 highs. The 130 big figure is where the daily moving averages are twisted together, and this would act as some sort of dynamic resistance too.
Yesterday’s low has also created a double bottom scenario from the lows printed at the end of 2021. If we see further pressure on the Euro and flows into the yen, this double bottom will be a big draw on liquidity as traders target the sell stops. The momentum could also overshoot, and the next major imbalance is as low as 123.50 so quite a lot of incentive for the Bears to keep pushing.
The ActivTrader sentiment indicator is a great contrarian indicator and currently, it shows most traders on the platform are trading short. This adds to my hypothesis that we could see a short-term bear market rally to squeeze this cohort out and the 130.00 could be where this happens.
On an hourly chart, it is clearer to see that traders could also be targeting the gap that failed to fill at the end of February 2022. Looking left on the H1 chart into the recent price action 128.88 is still open resistance and there is also the descending 200-period moving average to also put a ceiling on price but given enough momentum on the back of some good news out of Ukraine we could push that bit higher into the 130.00 level.
If you get short and trade with the overall trend, yesterday’s high is a perfect stop placement as we’re probably wrong if price visits up there again today. For those who would rather get in higher, the above analysis highlights where we could look for the next short trade. There is also the possibility of waiting for a breakout, retest, and continuation of a move through the daily double bottom.