Chapter 46 08/18 EURUSD: Trend-following Trading with Focus on Shorting at Highs
Summary: Eurozone's CPI for July recorded a monthly decline of -0.1%, marking the largest drop since January 2023. The annual CPI for July settled at 5.3%, in line with expectations.
Fundamentals
Eurozone's consumer price index (CPI) for July was finally confirmed to have grown by 5.3%, lower than the 5.5% year-on-year growth in June. Core CPI (excluding energy, food, alcohol, and tobacco) was confirmed at 5.5%, unchanged from June's data.
The EU CPI was finally confirmed at 6.1% year-on-year, lower than the previous month's 6.4%. Belgium (1.7%), Luxembourg (2.0%), and Spain (2.1%) had the lowest annual rates. Hungary (17.5%), Slovakia, and Poland (both at 10.3%) had the highest annual growth rates. Compared to June, the annual inflation rate decreased in 19 member countries, remained stable in one, and increased in seven.
The EURUSD continued to hover below 1.0900 on Friday, hitting its lowest level in about five weeks, remaining on a downward trajectory for the past month. Recent relatively moderate U.S. CPI data haven't triggered a sustained cyclical decline in the USD. Meanwhile, the economic growth prospects in the Eurozone seem to be deteriorating, a pattern expected to keep the EURUSD under pressure.
As the Fed emphasizes that future decisions depend on data, inflation and economic figures will be key factors affecting the USD. Therefore, if data results boost hopes of a soft landing, it might support the USD, but not solely due to monetary policy. Rather, it's more because compared to other economies, the U.S. economy appears to possess greater resilience within this current rate-hike cycle.
Meanwhile, the Euro lacks clearer signals. The European Central Bank hasn't had any officials speak publicly recently, with ECB officials scheduled to speak at the end of August. Hence, the focus remains on the USD. With forward-looking indicators pointing to an economic slowdown in key Eurozone countries, any rebound of the EURUSD later this year should mainly depend on a USD decline, rather than an unexpected Euro strength.
Lastly, the Euro and other pro-cyclical currencies seem to have a way of weathering the impact of an economic slowdown without major repercussions. However, this also means that a significant rebound of the EURUSD will likely be delayed. EURUSD might continue its narrow range fluctuations with a slight bearish bias, ultimately possibly retreating to the 1.0760 level.
Technical Analysis
On Friday, the EURUSD touched a 6-week low during the Asian session and signaled a fresh bearish sentiment after closing below the crucial 61.8% Fibonacci retracement level of 1.0879 on Thursday.
The oversold condition in the daily chart prompted this scenario. The daily timeframe maintains a strong negative momentum; Tuesday and Wednesday's closes registered long upper shadows, indicating heightened bearish pressure and exacerbating the negative outlook. Meanwhile, the recent trend staying below the 100-day SMA has constrained the gains of the past two days. The short-term correction has formed lower highs in the overall bearish structure, providing a better level for re-entry into the bearish market.
A closing price below yesterday's 1.0856 level would confirm the bearish signal, with subsequent targets at 1.0786 and 1.0760. In terms of trading strategy, it is recommended to go short at highs.
Trading Recommendations
Trading Direction: Short
Entry Price: 1.0857
Target Price: 1.0733
Stop Loss: 1.0970
Valid Until: 2023-09-01 23:55:00
Support: 1.0851, 1.0800, 1.0786, 1.0733
Resistance: 1.0930, 1.0950, 1.0980, 1.1000
