EURUSD reversed.

The single European currency reflects the overall FX market the most in terms of demand/supply ratio for the world’s reserve currency -- the US dollar -- as the EURUSD currency pair has more than 60% share of the greenback’s trading volume. Besides, when it comes to the fundamental and macroeconomic side of things, Euro will be the only alternative to the US dollar until the Chinese government will release the renminbi (Chinese Yuan) fluctuating freely. Since the long-term strategy of the second world’s economy -- China -- looks to be solid, and the superpower country is not willing to change its path to a hybrid economy, USDCNH is poised to fluctuate on a small portion of the overall volume in offshore exchanges. Therefore, if you were looking for a strong currency, then you would not have much choice rather than Euro.  

The European Central Bank is in the same situation with the COVID-19 pandemic as other regulators in the world. To keep supporting the economy, to minimize the negative impact of lockdowns, the ECB is forced to keep interest rates at zero levels with enormous amounts of additional stimulus. But if we put ourselves in the Fed’s shoes, we’d got nothing to do as well. FOMC has to pump the same enormous additional liquidity into the financial system. In simple words, keep printing more and more dollars.

Now since the elections’ impact is almost off the table (traders and investors always anticipate fundamental events and risks involved but not act afterward), the level of volatility is getting lower, and, what’s even more important, the risk appetite is growing. Therefore, financial institutions start including in prices another bale of fresh bucks printed by the Fed. Would you sit on the cash when the inflation eats a constant portion of it? Or would you find a reasonable and secure alternative to the greenback? Euro looks to be one of the best choices. 

The technical outlook gives me an additional reason for a cautiously optimistic forecast about the EURUSD exchange rate. When I open an intraday chart with a four-hourly time frame, the first thing I see is the reversal head-and-shoulders pattern. The neckline of the H&S figure must have the right incline (i.e. the right shoulder is lower than the left one). Next, the post-election day brought high volatility to the FX market and EURUSD was not an exception. However, both upper and lower tails were quite high meaning that traders used to enter into the market from both sides when the pair was offering attractive entries in terms of the amplitude. As a result, the last red candlestick’s close formed the right shoulder at 1.1660. If you were able to see that close rate in the middle of the night on Wednesday, you could have had a brilliant entry point. 

Since then, EURUSD is rallying for more than 150 points, and my analysis shows that it gained another 100 pips at least. The rate has breached the 89bars SMA and entered into the previous ascending channel. For the technical analysis, that means that a double resistance has been eliminated, and the bulls won’t stop until the next one. I will keep holding longs for EURUSD targeting 1.1850 and 1.1875 in extension.