Market Opinion Foreign Exchange 1.2200 Key For EUR/USD

Market Opinion Foreign Exchange

Our bearishness of last week was justified. As we said, a move through 1.2400 triggered declines to key support in the 1.2200-1.2220 region. This 1.2200 area is now growing in importance from a short-term technical perspective. Of course, writing just before the outcome of the German election, the next move is a little tricky to predict.

If the market takes the result negatively, assuming little progress on reform in Germany, then a break below 1.2200 would presage a re-test of the 1.1900 low of July this year. A move below this would then set up further declines to 1.1700, which we would expect to hold initially. However, if the euro survives the German election result in tact, and by doing so can hold the 1.2200 area, we would expect EUR/USD to move back up towards 1.2500 over coming weeks. It’s too tough a call at the moment, so we are going to watch the news from Germany with interest and gauge the market reaction over the next few days.

Either way, that right shoulder of the long-term head and shoulders pattern continues to take shape rather well. This means we still adhere to the potential for medium-term dollar gains against the euro. Growth and interest rate differentials will continue to favour the greenback, and as revealed by the latest TICS data, appetite for US assets is not diminishing, which will allow for comfortable financing of the US current account deficit. Flexibility is everything, and we are also willing to change our view quickly, but that’s how we see it at the moment, and in fact have done so since above 1.2800.

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