Long-term perspective
During the current week, the EUR/USD currency pair experienced a decline of 120 points. It cannot be said that fundamental or macroeconomic factors caused the decline of the European currency, but it also cannot be said that the decline was illogical. The fact is that the euro, in general, continues to rise. It continues to rise groundlessly, illogically, and simply in an inertial manner. A 120-point correction is insignificant, especially for the 24-hour time frame. Therefore, we have not seen any significant correction in the broader sense. The price has yet to reach the critical line, although it is not too far from it. So, what we have witnessed so far is just an ordinary pullback.
There were no noteworthy fundamental events. Since the Fed and ECB meetings will take place next week, a "silent period" has been entered, which implies a ban on comments regarding monetary policy by central bank officials. Accordingly, there were no important speeches. It should be noted that in recent weeks, none of the speeches have led to any significant market reactions. Nevertheless, they could still influence the background.
In summary, we still have an upward trend and are approaching ECB and Fed meetings, during which there will be minimal intrigue and a lack of desire from market participants to sell the pair. Therefore, long positions remain relevant. However, opening them is still not entirely safe because the euro is moving upwards practically without any grounds, which means it can collapse at any moment, just like the pound did this week. Nevertheless, there are no signs of the upward trend ending yet. We can only note a clear and precise rebound from the Fibonacci level of 61.8%, but it may only trigger a temporary pullback, not a new trend.
COT Analysis.
On Friday, a new COT report was released for July 18th. Over the past ten months, the COT reports have consistently corresponded to market developments. As seen in the chart above, the net position of major players (second indicator) started to rise in September 2022, around the same time the European currency began to rise. The net position has hardly grown in the last 5-6 months, but the euro remains at very high levels. The net position of non-commercial traders remains bullish and strong, and the European currency continues to appreciate against the dollar.
We have already drawn traders' attention to the fact that the rather high value of the "net position" suggests a possible end to the upward trend. This is indicated by the first indicator, where the red and green lines have significantly diverged, which often precedes trend reversals. During the last reporting week, the number of buy contracts from the "Non-commercial" group increased by 40.1 thousand, while the number of shorts increased by 1.5 thousand. Consequently, the net position increased by an additional 38.6 thousand contracts. The number of buy contracts is higher than sell contracts among non-commercial traders by 179 thousand, a very large gap, more than threefold. In principle, even without COT reports, it is obvious now that the euro should decrease, but the market is not in a hurry to sell, and there are no signals of a reversal yet.
Fundamental Events Analysis.
Throughout the past week, only one report was published in the European Union – the consumer price index for June. However, there was nothing to celebrate, as it was the second estimate of this indicator, which rarely differs from the first one. The same happened this week. Inflation decreased to 5.5%, while core inflation increased to 5.5%, and traders were already aware of this for two weeks. As a result, there was no reaction, and the euro's decline was clearly unrelated to this report.
In essence, this report did not change anything. The ECB needs to continue tightening, just as before, so a 0.25% rate hike is likely next week. Will this increase be the last one? Unlikely, but the ECB is certainly preparing to end the tightening cycle. Signals that Christine Lagarde can send to the market may create additional pressure on the euro, which is much needed by the "biggest loser of the year" - the dollar.
Trading Plan for the week of July 24th to July 28th:
- In the 24-hour timeframe, the EUR/USD pair suddenly and unexpectedly resumed its upward trend, which had been on hold for half a year. The pair has reached the Fibonacci level of 61.8% (1.1270) and started a minor pullback, but there are no signs of the upward trend ending. Therefore, buying positions are currently more relevant, though the fundamental reasons behind this movement are debatable; we believe there are none. The euro has risen by 1700 points in less than a year, during which time the Fed has been raising rates more aggressively and quickly than the ECB.
- As for selling the euro/dollar pair, it can be considered in the 24-hour timeframe after breaking below the Kijun-sen line. The euro is still overbought, so a decline is a more probable scenario, but the market is still forming an inertial upward trend. Fundamentals and macroeconomics are secondary at this time.
Explanations for the illustrations:
Price support and resistance levels, Fibonacci levels - these are the targets when opening buy or sell positions. Take Profit levels can be placed around them.
Indicators used: Ichimoku (standard settings), Bollinger Bands (standard settings), MACD (5, 34, 5).
Indicator 1 on COT charts - the size of the net position for each category of traders.
Indicator 2 on COT charts - the size of the net position for the "Non-commercial" group.
