Euro strength continues

July 31, 2017 02:58 PM

It was quite an uninterrupted run on the upside for the euro as the secular leader against the beleaguered U.S. dollar since the late June inferences on the European Central Bank and Bank of England turning less accommodative. Yet, the recent return to more dovish positions by the ECB has not assisted the U.S. dollar, as somewhat better European economic data has continued to favor the euro over the U.S. dollar and also nominally against the other developed currencies as well. Yet the most important euro trend remains against the greenback, as that seems to be driving the overall U.S. dollar weakness against the other developed economy currencies.

While the U.S. dollar was recently trying to claw back some of its losses, the end of last week seemed to show that was still an exercise in futility. The most telling development was based on the euro/U.S. dollar (EUR/USD) currency pair reaction from its new high for the rally last Thursday morning, as it closed well lower on the day.

Short-term DOWN Closing Price Reversal

That type of activity is classically known as a down (i.e. downward) Closing Price Reversal (CPR) for the opposite closing direction after a new extreme extension of a rally. [The opposite is true when there is a higher Close after a new low for a selloff: an upward CPR.] As noted in the opening graph, the key levels were the signal level at Wednesday’s 1.1733 daily close (the level from which the Thursday lower Close took place), and Wednesday’s 1.1740 high as a tolerance on that downward signal.

This is supposed to be a negative sign, yet has to be assessed in the broader context and has certain critical requirements to continue as even a short term reversal of such a strong previous up trend.

The broader technical context

In the broader context, Wednesday’s new high close for the rally was above the 1.1710 major 2.5-year 2015 high. And more telling from a trading view is a classical requirement that after a "down" CPR that there should be downside follow through in the following session. (We refer to "session" instead of "day" because the same applies to CPR signals in different time frames, like hourly, weekly or monthly charts.)

And that any downside follow through was obviously lacking on Friday’s higher trading put the "down" CPR signal at risk of negation (i.e. failing and being overrun as part of a move to still higher levels.) In fact, as of Friday’s close of the euro/U.S. dollar (EUR/USD) currency pair was already above the 1.1733-40 CPR down signal and Tolerance range. That is the indication the attempted down signal was negated.

This, in turn, is usually a very good sign that the market is ready to resume the rally. It also indicates any previous high of that rally (i.e. Thursday’s EUR/USD 1.1776 high) is likely to be overrun as part of a rally extension to a new high in the near term. In other words, just what is not surprisingly transpiring on Monday.

Broader "macro-technical" context

We always like to assess activity in multiple time frames and from the fundamental side as well to consider the full confluence of factors for any trend. And in this case that combined ‘macro-technical’ assessment has become more compelling across the past several sessions. The ‘macro’ fundamental elements are continued better-than-expected European data (even if there are select weak spots.)

That is against the still spotty U.S. economic data into Friday morning’s first look at Q2 GDP that was on target. Yet the GDP Price Index and Personal Consumption Expenditure both came in lighter than already fairly low estimates. Of course, the U.S. political risks to the markets from the potential failure of the Trump administration reform agenda also remain. We refer back to previous posts for more on that.

Yet the broader pure price trend confluence (the technical in macro-technical) of that 1.1710 major two-and-a-half year 2015 high, the near term top from slightly above it possibly being overrun could easily be an accelerator for the upward EUR/USD trend. That is because the next major resistance above that 1.1710 spike high from August 2015 (itself a Tolerance above the more prominent 1.14-1.15 congestion) is the 1.2000 area ("big penny" as well) with the 1.2350 area above that.

That is due to the manner in which EUR/USD came crashing down below the long-term historic and more recent (2006-2014) congestion in those areas on the early 2015 anticipation of the massive ECB quantitative easing expansion that only officially began in March 2015. As the old cliché goes, “The market is a creature of expectations.”  

As such, within the confluence of technical trend influences, Thursday’s EUR/USD 1.1733 CPR "down" signal being negated above its 1.1740 Tolerance means the prospects are for an even more accelerated phase of the euro up trend. That should be to at least the 1.2000 area prior to any significant correction. That seems reasonable on the macro context of the comparative data and secular strength of the euro.

US dollar index "mirror image"

As the trend of the U.S. dollar has not been quite as weak elsewhere as against the euro, the U.S. dollar index is NOT threatening to drop to a new multi-year low. Yet given the heavy weighting of the euro in the U.S. dollar index, it is no surprise the index put in an "up" CPR on Thursday from its 93.15 low for the down trend to finish above Wednesday’s 93.48 close.

That U.S. dollar index UP signal had a Tolerance at Wednesday’s 93.37 trading low. As it was also slightly back below that level on Friday’s close (mirror image of the EUR/USD strength), it also looks to be headed lower in general.  

However, even if it is only the euro that accelerates its up trend against the greenback, the U.S. Dollar Index failure below hefty 94.00 congestion still looks weak. Even so, there are further key levels below from the last couple of years, such as the hefty 93.00 area congestion and its own two-and-a-half year May 2016 spike bottom 91.91 trading low.

Thanks for your interest.

Rohr International’s active analysis of how short-term activity fits in with the intermediate- and long-term trend indications is another MODERN TRADER advantage.

Rohr International Risk Disclaimer: This analysis is intended solely for educational purposes. Investing and trading involves considerable risk, and losses can be substantial. Rohr International is not responsible for, and assumes neither any specific nor general liability of any business actions, market transactions, or decisions based on information published, suggested, or recommended in this analysis. See more here. 

*Main image courtesy of ECB July 20 press conference streaming video.

About the Author

Alan Rohrbach is Lead Analyst and President of Rohr International, Inc.  He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.