Hey! This is Philip with our new weekly outlook of the Forex market.

 

 

 

While the dollar did not break below the September low last week – technically holding the ranges – it did close the week lower. This has reignited speculations for a broad-based decline in the US dollar over the following months. With the September lows under threat now, Forex traders retain a predominantly bearish bias on the dollar, even as short positioning remains at extremes.

Such a dynamic among investors does suggest that a broad USD decline is likely on a longer-term horizon. But the mix of extreme short positioning and loud cheering from the bears anytime the lows are attacked is not the best cocktail for an extension of the bear USD trend in the near-term. Very often, such an extremely bearish consensus can turn into a sharp short-squeeze reversal. This is probably the main risk now to the bearish dollar outlook. Therefore, it pays to be vigilant.

The USD calendar this week features Fed Chairman Powell’s testimony before Congress on Tuesday and Wednesday, and the Nonfarm payrolls on Friday. While these events may induce some volatility into the dollar, they are not expected to be game-changers. Instead, the pandemic and the stringency of the possible new lockdowns is what markets care about at the moment. Worries are that the incoming Biden administration will try to fight the pandemic with more restrictive measures, which would negatively impact the US economy. This, in turn, would be met by more Fed liquidity injections, which is bearish for the dollar.

 

 

The euro is climbing against the dollar but stays more neutral versus other major currencies. Many investors expect the ECB to react now that EURUSD is trading around 1.20, similar to Governor Lane’s comments back in September.

The ECB will meet in ten days (December 10). They are expected to unveil an expansion of the money printing program as well as clarify whether 1.20 in EURUSD is a line in the sand for them or not. With such a highly anticipated risk event ahead of us, it’s not advisable to chase the EURUSD rally higher at this stage.

Inflation data is in focus on the EUR calendar. The CPI flash estimate is out on Tuesday, expected at a deflationary -0.2% y/y. But as with the US dollar, the markets care more about who handles the pandemic better than actual economic data. The numbers of new COVID infections in Europe improved markedly over the past 1-2 weeks, and perhaps that’s one of the reasons why the euro is gaining against the dollar. If the numbers of new infections stay low, the EUR may extend the rally further.

 

 

EURUSD is inching higher but has not broken the strong resistance area in the 1.19 – 1.20 area yet. The rising trendline we discussed here last week still holds. However, upside risks have increased with the recent price action breaking through 1.19 and 1.1950. The last hurdle is 1.20. If the price moves above it and holds, technical traders will deem it a bullish breakout, which could be enough to take EURUSD to 1.22 fairly soon.

To the downside, the 1.19 level is the nearest support, albeit only of moderate importance. 1.18 and 1.1750 are the next support zones lower. Below them, the 1.16 lows will come into focus, but that seems a little far-fetched at this point.

 

 

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Best Regards,
Philip
Senior Forex Manager
FX Trading Revolution
w: www.fxtradingrevolution.com 

e: [email protected]