By Jignesh Davda - INVESTOPEDIA
EUR/USD rallied to fresh August highs in European trading on Tuesday, briefly trading above the 1.1700 handle prior to paring a bulk of the day's gains. The pair signals some potential for a pullback over the near term after an impressive two-week rally; however, the larger time frames seem to indicate that the dollar correction may just be starting.
The currency pair fell just one pip shy of testing the 1.1300 handle in the middle of the month and has rallied roughly 400 pips since. As a result, a doji candlestick appears to be in the making on a monthly chart. If such a candle were to print, it would the third consecutive month that the exchange rate closed essentially unchanged. The big difference for August is the long tail on the candle that reflects the journey to 1.1300 and the subsequent failed attempt to break notable support, which includes the 200-period weekly moving average. This pattern would suggest exhaustion in the downtrend that has dominated the pair for most of the year and could mark the start of a more meaningful corrective rally.
Over the near term, price action suggests some potential for a pullback. On a four-hour chart, the pair is on pace to print a bearish evening star reversal candlestick pattern following a failed attempt at a sustained push above 1.1700. That, combined with the monthly range, could see the pair correct lower. In addition to the technical picture for the currency pair, the economic calendar provides a reason for dollar bears to exercise caution as U.S. GDP figures are expected to be released on Wednesday.
Analysts are expecting the preliminary GDP report to show an annualized 4% growth rate in the second quarter. As the advance reading came in strong, there's little reason to believe Wednesday's reading will disappoint. The Atlanta Fed sees some upside potential and is expecting second quarter growth to rise to 4.7%.
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Aside from U.S. GDP, market participants will be following trade headlines closely this week, as recent White House communication indicates that Canada and the United States may be close to an agreement. Up until recently, trade headlines caused uncertainty in the markets and had underpinned the dollar. With talks that an agreement could be in place this week, the greenback has lost some of its safe-haven support. As well, U.S. equity markets have been strong as of late, with the S&P 500 closing at a fresh record high on Tuesday, further drawing from dollar demand as a safe-haven currency.
Positioning in the futures markets continues to point to a strong bullish bias for the dollar, which could catch speculators off guard if the dollar were to continue correcting lower. Just two weeks ago, speculators shifted to a net long euro position for the first time in 15 months. The latest report reflected a build in net short positioning from 1,800 contracts to 4,800, and all major currencies in the report were shown being held net short, which points to a sizeable long aggregate dollar position. There seems to be a divergence in bias, as there was a notable build in both gross long and short euro positions recently. This is much more pronounced in sterling positioning, as the report shows a staggering 55% build in gross long positions over a two-week period, while bears have increased their positions by about 37%.
EUR/USD appears poised to be confined to a 100-pip range in the week ahead as it looks to close out the month of August. Notable levels include 1.1744 to the upside and 1.1623 to the downside. The former reflects a horizontal level that has acted as both support and resistance on a daily chart. Adding confluence to the level is the 20-period weekly moving average, currently residing at 1.1731. The latter refers to the 20-period monthly moving average. In addition to the indicator, further support is found with close proximity at 1.1616. The level reflects important resistance from 2015 and 2016, best seen on a daily chart. More recently, the horizontal level acted as resistance in early August and just last week. Slightly ahead of it is a broken declining trendline that originates from the June high. An upside breach materialized on Monday, and a retest is likely to see some buyers.
