The European stock market takes on a risk-on mood and marches ahead of the US stocks, indirectly adding positives vibes to the EUR. At the same time, while the general economic outlook is not dim enough to push investors to the USD, they are cautious of the domestic disturbances in the US. Altogether, the USD enjoys less attention while the EUR enjoys more of it – so the EUR/USD rises.
The first two-thirds of the month of May saw the EUR/USD flowing inside of the horizontal channel 1.0770 – 1.1000. After May 20 things changed: it broke the upper border of the channel and started rising, eventually climbing above 1.1330. The configuration of the MAs changed accordingly: 50-MA, 100-MA, and 200-MA are now re-positioned in correct ascending order.
Therefore, technically, there is no stopping to this trend so far – at least, it still has room for continuation until it reaches the March high of 1.1470. Can we expect it? Yes, we can. But we have to be aware that this rising is pretty much a consequence of a local positive affection of the market on some good news from the ECB in terms of financial aid to the Eurozone.
As soon as this affection ends – and very possibly, it does once the EUR/USD reaches the resistance of 1.1470 – there will be not much impulse for the EUR to keep pushing. Unless there is more good news from the EU, which is quite unlikely as the ECB recognizes itself that the recovery is falling into the worst-case scenario.
Strategically, however, we have to recognize a different picture. The structure and parameters of the European economy haven’t improved, even if we remove the virus from the list of factors. However, the crisis created by COVID-19 and the ensuing restrictions revealed some deep cracks in the Eurozone’s integrity to the extent that the Union as such was doubted at times. Furthermore, the effects of this crisis will stay after the virus itself is gone away: economically, it increased the polarity in the EU and widened the economic and political distance between the member states.
In the long-run, that may erode EUR’s grounds of stability. The racial issues in the US are unlikely going to be of the same economic gravity to the USD as the inter-state disputes in the EU are to the EUR. Therefore, unless the internal racial disparities bring the US down to a completely chaotic dystopian state like in “Mad Max”, the strategic positioning of the USD will stay stronger than that of the EUR.
1.1330 is a strategic resistance level reinforced by the 200-week Moving Average. The price is testing it currently, bending the 2-year downtrend into a straight horizontal direction. To actually break this trend, the currency pair needs to trade consistently above the support of 1.1000, which currently is the nearest tactical checkpoint for bears.
Therefore, even in the case of a long-term bullish reversal, initial retrace down to 1.1000 is likely to happen first. After that, if the EUR is strong, the currency pair will diminish fluctuations to go along 1.1000 or above it (which strategically is more unlikely that not). Alternatively, the EUR/USD will fall back into the downtrend it, and 1.10770 will be there to indicate that.
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This article was originally posted on FX Empire
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