The EUR/USD currency pair finally began to move downward this week. So far, it has only lost about 200 points, which is a little. But after two months of growth, even such a move seems like a gift. It can't be said that there were many important macroeconomic and fundamental events this week. Essentially, all of the market's attention was directed at the Bank of England meeting, the results of which were unanimously interpreted as "dovish." And that's quite fair. We have often said that the baseless growth of the euro and the pound could be based on the "interest rate divergence" factor. Simply put, the ECB and the Bank of England (as of a few months ago) were supposed to raise their rates more strongly in 2023 than the Fed.
However, this factor could only sometimes support the euro and the pound. Both European central banks continue to signal their readiness to tighten monetary policy, but simultaneously, the market understands perfectly well that the "end moment" is near. And the market always reacts to such global changes "in advance" as they become known. Therefore, the market has already worked out all the BoE and ECB rate hikes. The euro could have fallen following the pound on Thursday and Friday, as they are often strongly correlated.
Thus, the pair may soon return to the 5th level, from which the last round of growth began. Fair correction targets are in the range of 1.02-1.03. After reaching these levels, it will be possible to discuss a new trend in the market and analyze the fundamental background.
COT Analysis.
A new COT report for May 9 came out on Friday. In the last nine months, the data from the COT reports have fully corresponded with what is happening on the market. The illustration above clearly shows that the net position of large players (the second indicator) began to grow in September 2022. Around the same time, the European currency also began to grow. At this time, the net position of non-commercial traders is "bullish," remains very high, and continues to grow, as do the positions of the European currency, which so far can't properly correct downwards.
We have already drawn traders' attention to the fact that a rather high value of the "net position" allows us to assume the imminent end of the uptrend. The first indicator, on which the red and green lines have moved far apart and frequently come before the end of the trend, suggests this. The European currency tried to start falling a few months ago, but all we saw was a banal and not very strong rollback. During the last reporting week, the number of buy contracts for the "non-commercial" group increased by 13.5 thousand, and the number of shorts - by 7.5 thousand. Accordingly, the net position grew again by 6 thousand contracts. The number of buy contracts is higher than the number of sell contracts; among non-commercial traders, it's already at 180 thousand, which is a very large gap. The difference is more than threefold. A correction is still brewing, so even without COT reports, it's clear that the pair should start falling.
Analysis of fundamental events.
During the current week, there was virtually no important macroeconomic publication in the European Union. Only in Germany was the final inflation report for April released, but it did not generate any interest. However, there were a whole series of speeches by ECB representatives, but they could have brought more benefit to traders. The last meeting took place just last week. It would be strange if the rhetoric of the Monetary Committee representatives changed this week, even without waiting for new reports on inflation, the labor market, GDP, and unemployment. Therefore, most comments indicated that monetary policy should continue to be tightened, but decisions should be made from meeting to meeting, depending on the data received. The ECB has virtually completed its monetary tightening cycle, and the market has more than made up for all possible rate hikes.
Trading plan for the week of May 15–19:
On the 24-hour timeframe, the pair has begun to move down, which we have been waiting for a long time. We hope it will continue in the coming days at the current positions. Purchases are no longer relevant now, as the price has been fixed below the critical line. Moreover, the fundamental and macroeconomic backgrounds do not support the euro currency, so it is easier to count on further growth with a noticeable correction. If it fixes back above the Kijun-sen line, you can trade upwards, but we still believe that such growth will need to be revised. Therefore, one cannot be sure of it. As for selling the euro/dollar pair, they could have been opened on the 24-hour TF after overcoming the Kijun-sen line, as we said in previous articles. The nearest target is the Senkou Span B line, and the next target is the 1.05–1.06 area. The euro remains extremely overbought, so a fall is the most likely scenario. This scenario will be canceled if it fixes above the critical line.Explanation of illustrations:
Support and resistance price levels, Fibonacci levels - these are targets for opening purchases or sales. Take Profit levels can be placed around them.
Indicators: Ichimoku (standard settings), Bollinger Bands (standard settings), MACD (5, 34, 5).
Indicator 1 on COT charts - the size of the net position for each category of traders.
Indicator 2 on COT charts - the size of the net position for the "non-commercial" group.