Analysis of EUR/USD 5M
Yesterday, EUR/USD suddenly woke up and traded lower. It surpassed two recent local lows on the hourly timeframe, but the decline quickly ended, and the price is currently correcting higher again. Despite our preference for a stronger downward movement, it's worth noting that at least the euro occasionally moves downwards, while the pound continues to remain in a sideways channel. So, we won't be too strict with the euro.
The decline was not triggered by anything specific. From a technical perspective, the price did not bounce from any important level or line. Fundamentally, there were no significant events, and in terms of macroeconomics, there were no important reports. The euro simply fell out of the blue. However, we believe that this is perfectly logical, as the euro has been steadily rising for the past 3-4 months.
Sometimes, the upward movement is justified by weak U.S. data or excessively dovish rhetoric from the Federal Reserve representatives in December. However, European reports were not particularly strong either, and the European Central Bank will begin to cut rates in 2024, which is a whole 1% lower than the Federal Reserve's rates.
Therefore, we believe that the euro should fall regardless of the circumstances, with targets around 1.0450.
Speaking of trading signals, three were generated yesterday. Initially, the price stayed above the level of 1.0889 but managed to rise by only 10-15 pips. It was possible to set a stop-loss to break-even if you wanted to. Then there was a consolidation below the critical line, afterwards the pair fell down to the level of 1.0818, falling short by just 4 pips. Nevertheless, the short position turned out to be profitable, as there were no buy signals formed by the end of the day, and it could be closed at any point.
COT report:
The latest COT report is dated January 16th. As seen in the charts above, it is clear that the net position of non-commercial traders has been bullish for quite some time. To put it simply, the number of long positions is much higher than the number of short positions. This should support the euro, but we still do not see fundamental factors for the euro to strengthen further. In recent months, both the euro and the net position have been rising. However, over the past few weeks, big players have started to reduce their long positions, and we believe that this process will continue.
We have previously pointed out that the red and green lines have moved apart from each other, which often precedes the end of a trend. At the moment, these lines are still far apart. Therefore, we support the scenario in which the euro should fall and the uptrend must end. During the last reporting week, the number of long positions for the non-commercial group decreased by 4,200, while the number of short positions increased by 10,600. Consequently, the net position fell by 14,800. The number of buy contracts is still higher than the number of sell contracts among non-commercial traders by 104,000. The gap is quite large, and even without COT reports, it is clear that the euro should continue to fall.
Analysis of EUR/USD 1H
On the 1-hour chart, EUR/USD settled below the Kijun-sen line, and if it can remain below it, the decline may resume today or tomorrow. Remember that the results of the ECB meeting will be announced on Thursday, and the euro is likely losing market support against this backdrop.
Today, we believe you may consider long positions with 1.0922 as a target if the price crosses the critical line. It will be reasonable to consider shorts if there is a bounce from the Kijun-sen line with 1.0818 as the target. We still don't see any strong reasons for the euro to rise significantly.
On January 24, we highlight the following levels for trading: 1.0658-1.0669, 1.0757, 1.0818, 1.0889, 1.0935, 1.1006, 1.1092, 1.1137, 1.1185, 1.1234, 1.1274, as well as the Senkou Span B (1.0922) and Kijun-sen (1.0869) lines. The Ichimoku indicator lines can move during the day, so this should be taken into account when identifying trading signals. Don't forget to set a breakeven Stop Loss if the price has moved in the intended direction by 15 pips. This will protect you against potential losses if the signal turns out to be false.
On Wednesday, January business activity statistics in the services and manufacturing sector will be presented in the EU, Germany and the US. These are not crucial reports, but there will be a lot of them, and their values can be resonant. Therefore, these reports could influence market sentiment.
Description of the chart:
Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals;
The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals;
Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals;
Yellow lines are trend lines, trend channels, and any other technical patterns;
Indicator 1 on the COT charts is the net position size for each category of traders;
Indicator 2 on the COT charts is the net position size for the Non-commercial group.
