In terms of EURUSD, we have seen a big sell-off as expected and we are closing in on the psychological 1.000 level. If this level breaks, we could see a move to longer-term monthly levels at 0.9600 then 0.900. In the short term though we expect a bounce which will be a good risk to reward sell. Our view of the fundamentals sentiment and key technical levels are below.
Why is the Euro bearish?
As we have noted in previous articles the zone is heading for a recession and the ECB cannot raise interest rates. The two charts below are interesting… Despite the ECB talking about raising rates there balance sheet is increasing as they print more money! They can raise interest rates to 1.5% which the market expects this year.
The second chart shows why the economy might go into recession: “Eurozone M1, a key lead indicator, is pointing to a downside to PMIs. Everyone, of course, believes PMIs will be in contraction territory and are reluctant to step into the market until this materializes. Can there be a surprise to the downside? ( TME) Yes, there can be a surprise…
Are large speculative funds already heavily short the Euro? The answer is no which we can see on the chart below. In fact its only in recent weeks we have seen large speculators sell in the last year they have been mostly long even though the euro fell back from 1.22! If large speculators do load up on shorts we could see far more downside.
The USD has a yield advantage which is set to increase further as ECB disappoints with rate rises. The recession coming in the euro zone will be long and deep. With the recession and high inflation, we have the nightmare scenario for the ECB which is stagflation. The Euro has a long way to go on the downside but in the short term, we expect a bounce to correct oversold.
The big trend is down and targets are monthly support at 1.000, 0.9600, and a possible overshoot to 0.9000. In the short term, a bounce is expected but the euro is going far lower in our view.