EUR/USD consolidated in European trading on Tuesday after declining in the prior three consecutive sessions. The drop is attributed to a stronger dollar, and recent developments suggest that there could be more downside for the pair. A combination of extreme positioning and a rise in U.S. bond yields drove the rally in the greenback, with the trade-weighted dollar index piercing to a three-month high. This has led to a notable technical break in EUR/USD as the pair has taken out a one-year long rising trendline.
The latest Commitment of Traders report showed euro net long positioning rising to a record 151,000 contracts, pointing to an extreme bearish dollar bias among non-commercials. Adding to this is the rapid unwinding of yen short positioning that took place last month. Relatively small fluctuations in other major currencies during this unwinding suggest that the markets added to an already large bearish dollar bet. In this context, the dollar is vulnerable to a short squeeze.
A rise in U.S. government bond yields provided the catalyst for the dollar turn. The 10-year Treasury note yield has been rallying for the past four consecutive days and is nearing the psychological 3% level, which is the highest since January 2014. Bond yields have been influenced by easing trade tensions and rising commodity prices, with the price of oil climbing above $75, which is the highest level since November 2014.
The rally in oil prices will likely trigger speculation that the Federal Reserve may be more aggressive in its path of normalization, as the oil price increases suggest upward pressure on inflation. The central bank is scheduled to meet next week, on May 2. The general analyst consensus for the European Central Bank (ECB), however, is a more cautious meeting, as inflation and other economic data are negatively affected by a stronger currency. The ECB is scheduled to release its rate decision shortly after the meeting with a press conference on Thursday. In addition to the ECB meeting, U.S. GDP data, scheduled for release on Friday, also stand to have a significant impact on EUR/USD this week.
The recent broad-based dollar strength has led to technical developments in several of the major currency pairs aside from EUR/USD. For example, AUD/USD is trading near lows not seen since mid-December after dropping about 2.5% from last week’s high. NZD/USD is close to turning to negative territory for the year and has broken down from a three-month consolidation. GBP/USD, after briefly piercing to its highest level since Brexit, reversed sharply last week following dovish comments from Bank of England (BoE) governor Carney. The pair has posted a bearish engulfing candle on a weekly chart.
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A rally above a horizontal level at 90.40 has broken the U.S. Dollar index (DXY) out of a 13-week consolidation. However, the equivalent of the year-long trendline in EUR/USD remains in play for DXY and currently points to resistance around 91.65.
EUR/USD found support in European trading on Tuesday from a confluence of support but has struggled to make a meaningful recovery. The pair bounced after testing the 100-day moving average as well as a horizontal support at 1.2182. The level has held the pair within a consolidation pattern that has taken place for most of the year thus far. Encouraging for bears is the break below the rising trendline originating from a low posted last April. Furthermore, the pair has declined to fresh monthly lows, posting a succession of lower highs and lower lows from the March peak in the process.
Resistance on a four-hour chart is found at 1.2239, as it held the pair higher in late March and early April. Further resistance is found at 1.2314, a level that acted as support earlier this month. The horizontal price point also carries some confluence, as it is currently near a declining trendline that originates from this year’s high.