• EUR/USD bears waiting to pounce with bearish H&S in the making.
  • USD volatility seeking a convincing break to the upside as US yields firm and FX intrinsic values are finally measured.

EUR/USD is currently trading at 1.1817 and between a 1.1777 and 1.1864 range while recently pulling back from the highs as the US dollar firms in New York trade.

Trade war angst and the coronavirus pandemic held back the bulls that had otherwise got off to a promising start on Thursday, extending the prior day’s rally from the depths of the 1.17 area.

The dollar had been on the back foot, but the combination of US equities wobbling after a breach of the all-time closing high, the US bond auction (spike in US yields) and jittery summer markets along with the trade war fears have all contributed to the volatility.

As for data, the initial claims for US state unemployment benefits dipped below 1 million for the first time since mid-March.

However, the expiration at the end of July of a $600 weekly jobless supplement may well have been a contributing factor to the decline.

What investors may still be concerned for is that the data last week showed the economy regained only 9.3 million jobs of the 22 million lost between February and April.

US yields to lift the dollar off the floor

Meanwhile, higher Treasury yields may currently be offering the USD some support as real yields come off their bottoms in tandem.

However, considering the consensus that the Federal Reserve will allow inflation to spike higher before stepping forward with a significant policy tightening, the dollar could still find its self up against plenty of supply.

We have had both a stronger than expected print in US Producer Price Index inflation data and Consumer Price Index data this week.

That said, it really all boils down to the September Fed meeting, and for now, therefore, regardless of concerns for real yields and runaway inflation, higher yields could help to rebalance sentiment for the greenback in the short term

The US dollar’s intrinsic value, such as its safe-haven qualities in light of increasingly concerning geopolitical tensions between the US and China, and for its offshore demand pertaining to its reserve currency status, potentially outweighs US economic headwinds.

Therefore, the downside in the DXY may be limited and contained within familiar historic levels.

The summer months are coming to a close and September could be the return of full liquidity.

There is plenty of EZ data that will be reflected upon between then and now which will make for a risky period for committed EUR/USD bulls while positioning data is heavily skewed at record levels.

 While the EUR’s fundamentals have improved in recent months on the back of the EU’s Recovery Fund and on the strength on ECB policy objectives, it is possible the trend is becoming over-extended.,

analysts at Rabobank have argued.

EUR/USD levels

The start of the week’s analysis still holds-up.

The bulls stay in charge while idling the critical support structure as illustrated within the analysis.

Daily chart (up to date)

Bearish Head & Shoulders (in the making)

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2020-08-13