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Today’s EU and UK manufacturing PMIs surprised to the upside and both the pound and euro rallied, with the cable hitting that $1.40 hurdle I have been forecasting for a while and GBP/CHF climbing to my 1.25 long-term target.
My focus is now turning to the euro, which could be about to break out soon and potentially head towards the 1.25 area next.
With the GBP/USD making its move first, the EUR/USD is now highly likely, in my opinion, to follow suit in climbing towards its own corresponding milestone of 1.25 handle next. That’s because these currency pairs have a strong positive correlation with one another, as you can see below:
|
3 months |
6 months |
1 year |
|
|
EUR/USD vs. GBP/USD |
+0.90 |
+0.90 |
+0.80 |
Beyond this simple correlation matrix, there are obviously several other reasons, including both macro and technical considerations, why I am bullish on the single currency.
From a macro point of view, the following are among some of the reasons, I hold a positive view towards the EUR/USD:
- Optimism about a sharp global economic rebound due to the ongoing vaccine rollouts will likely keep foreign currencies, including EUR, supported against haven currencies like the USD, JPY and CHF—which means I am currently bullish on EUR/USD, EUR/JPY and EUR/CHF.
- The fact that a no-deal Brexit was avoided at the back end of last year should be good news not only for the UK, but the Eurozone economy as well, further reducing longer terms risks.
- The ECB is probably done with providing additional measures, which means Eurozone bond yields should climb as recovery takes shape.
More to the point, it is the charts and price action—reflecting the market’s collective thoughts and actions—that makes me uber-bullish on the EUR/USD.
The daily chart of the EUR/USD shows a clear bullish trend with rising moving averages and the price continuing to consolidate inside a bull flag pattern after holding its own above the key 1.20 support level:
What I would like to see next from a bullish point of view is a break above the shaded resistance range between 1.2150 and 1.2200. A clean break above this zone should offer decent buying opportunity on the rounded retest to potentially take us to new highs on the year.
The monthly chart is looking quite strong, too, with the long-term bear trend already having broken down in 2020 and with rates climbing and now holding above that 1.20 handle:
The fact that the EUR/USD has now moved back above the January 2021 low means that the sellers who were looking for a breakdown below 1.20 may have already been trapped. If the bears are indeed trapped, which I think is the case, then a quick rally above the January range, at 1.2350, is likely, where a cluster of sellers’ stop orders will surely be resting—thus providing a pool of liquidity for the market to reach for. This makes it likely we will see an accelerated move higher towards 1.25s in the coming weeks.
Meanwhile, the EUR/USD on this long-term time frame also seems to be following the path of the 2017-18 rally when rates surged higher earlier in the year before spending a few months in consolidation ahead of more gains in early parts of 2018. Since March last year, the EUR/USD has again rallied in a very similar fashion, consolidated for a while below the 1.20 handle and then broke out again. If this is anything to go by then a rally towards, and potentially beyond, 1.25 could be on the cards next.
So, the EUR/USD charts look quite bullish. As such, I would be more inclined to look for buying than selling opportunities as things stand and in any case until the charts suggest otherwise.