Analysis of EUR/USD 5M
EUR/USD corrected higher on Thursday, and, by the end of the day, it surpassed a critical line. The downtrend remains intact at the moment, but the pair often corrects upwards, so breaching the Kijun-sen line is not a signal that points to the start of a bullish trend reversal. Yesterday, the market had a good reason to get rid of the dollar (or take profits on short positions). Two of the U.S. reports turned out to be significantly weaker than forecasts. Retail sales decreased by 0.8% in January, while forecasts predicted, at most, a decrease of 0.1%, and industrial production fell by 0.1%, while traders expected it to rise by 0.3-0.5%.
Therefore, it was quite predictable that the dollar would fall, but these two reports hardly affect the overall fundamental, macroeconomic, and technical picture. The American economy is still stronger than the European economy. The European Central Bank is contemplating the first rate cut as early as the beginning of summer. At the same time, the Federal Reserve is postponing its first rate cut from March to May or maybe even June. In the end, both central banks may almost simultaneously start lowering rates, which sharply contradicts traders' expectations from a month ago. We believe that the dollar still has an advantage, so it will eventually start an upward movement.
There were few trading signals on Thursday. Despite the market's reaction to the U.S. data, volatility was only 50 pips. Buy signals formed after the pair broke through the area of 1.0751-1.0757 and rebounded from it. Traders could open long positions in both cases, but as we mentioned earlier, the upward movement was not very strong, so it was not possible to make a substantial profit. Today, the pair may fall.
COT report:
The latest COT report is dated February 6. The net position of non-commercial traders has been bullish for quite some time. The number of long positions is much higher than the number of short positions. However, in recent weeks, the number of longs has been decreasing, while the number of shorts is rising, which aligns with the euro's current movement and our expectations.
We believe that the euro should fall and the uptrend must end. During the last reporting week, the number of long positions for the non-commercial group increased by 2,000, while the number of short positions increased by 28,800. Accordingly, the net position fell by 16,600. The number of buy contracts is still higher than the number of sell contracts among non-commercial traders by 62,000. The gap is quite large, but we're starting to see a noticeable change. Even without COT reports, it is clear that the euro should fall further.
Analysis of EUR/USD 1H
On the 1-hour chart, the downtrend persists, even if the pair consolidated above the Kijun-sen. In our opinion, all the factors currently indicate that the dollar will strengthen. Therefore, we expect the euro to fall. The nearest target is the area of 1.0658-1.0669. The pair may achieve this target in the near future. Now we need to wait for the corrective phase to end and the price to firmly settle back below the critical line. This could happen as early as today.
On February 16, we highlight the following levels for trading: 1.0530, 1.0581, 1.0658-1.0669, 1.0757, 1.0823, 1.0889, 1.0935, 1.1006, 1.1092, as well as Senkou Span B (1.0813) and Kijun-sen (1.0751) 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 Friday, there are no significant events lined up in the European Union, while the U.S. will publish a few secondary reports. While they may provoke a reaction of 30-40 pips (which we witnessed yesterday), we don't expect strong movements. On the U.S. docket, Core PPI, PPI, Building Permits, and Preliminary University of Michigan Consumer Sentiment, will be due later on Friday. If, for instance, all three turn out to be strong reports, the dollar may rise by 50-60 pips. The downtrend will remain intact as long as the price remains below the Senkou Span B line.
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.
