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EURUSD (Trade Idea, Jan 2021) Sell Stops Being Hunted?!

Updated: Mar 28, 2021

Happy holiday traders, there's a lot that has gone on in the background over the festive period. One of the biggest shock announcements regarding the EU was the Brexit certainty. The EU have now agreed on a deal which needs to be given the go ahead by the European Parliament in the new year.

How will the EU now perform after losing a key participant in the bloc?

Let's take a look to see the currency value expectations in the high level summary.

High Level Summary (EUR/USD) - Logikfx

When I was doing the data research and analysis EURUSD was one of the key currency pairs that stood out to me. Why? Majority of the factors I considered were all starting to signal an upside movement. Majority of the economic indicators excluding interest rates which were neutral were saying EURUSD is looking kind of bullish! This gave me the overall outlook that EURUSD should be heading into the upside during 2021.

The main indicator I used was the currency strength meter here at logikfx. It saves me so much time analysing when I know which currency pair to focus on. So let's take a look to see what the currency strength meter was saying.

Macro Currency Strength Meter - Logikfx

The Logikfx Macro Currency Strength Meter throughout December showed very interesting bullish signals for EURUSD. You can see on the indicator that since 06/12/2020 there's been a strengthening macro score for EUR whereas for USD we've seen it weakening on an economic level since November!

This crossover is quite interesting as it really helps filter out the currency pairs in the market to focus on one where the fundamental data is giving is a bias. In this case based on the data EURUSD is looking nicely bullish. Now we can really dig into the data to see if everything else is agreeing with this bias.

Gross Domestic Product Differentials

The GDP differentials was the next step in the analysis. We used the GDP differential indicator we have at Logikfx to gauge what the IMF were forecasting. In this case we saw a change in differential of 4.5% predicted in 2021. This is a bullish data signal for GDP as it shows the EU is expected to outgrow the US in 2021. Considering the reaction to the pandemic I can see why!

Volkswagen vs EURUSD

Europe is a leading area of the world which exports vehicles. Your top vehicle brands all come from Europe whether it be BMW, VW or Mercedes Benz! That's why we've also included it in the analysis as it has a huge impact on the currency value when companies across the world are ordering millions if not billions of euros to buy cars!

The data in this case showed that over the past 10 years we had a -22% correlation to EURUSD so 1 out 5 times when VW prices went up, EURUSD went down. In this case we're seeing VW prices increase meaning currently the data isn't all that in favour of our long idea.

EURUSD vs Crude Oil

Crude oil prices was the main commodity chosen as an analysis point with Europe importing majority of their oil and the US being a huge exporter being the reason. What we saw was a huge 88% positive correlation between EURUSD and WTI meaning most the time we're nearly an identical price chart!

You can see WTI crude oil prices start to rebound towards pre-covid levels which is followed by a rally in EURUSD! This is agreeing with our strength meter direction of being bullish.

EURUSD vs Exxon Mobil

Exxon Mobil on the other hand is an American oil company which has a positive correlation to EURUSD. 25% positive correlation to be exact! We recently saw due to poor performance Exxon was removed from most US stock indices. In the recent months however we've seen double digit growth in the stock price, could it be anticipation of oil buyers or is it a fake reversal?

Overall, Exxon seems to be agreeing with the EURUSD upside move which is great and summarises our import and export analysis with a positive bullish confluence.

Interest Rate Differentials

The interest rate differentials is one of the monetary factors we consider from the central banks. It really helps identify the flow of money and thus currency demand and value. What we saw with the interest rate differentials is that during 2015 to 2019 the differentials were falling quite fast, EURUSD congested most the time with several opportunities to sell. However, recently the interest rate differentials have been tightening, mainly the US interest rates are getting really low same with EU interest rates, the gap is getting close to 0.

Since there's not been any specific changes recently we've scored it neutrally neither agrees or disagrees. If the blue line was to continue upwards we'd see with high confident that the EURUSD will break previous highs and head upwards!

Stock Market Performance

Overall, we've chosen the major US stock market the S&P500 which tracks the performance of the top 500 companies in the US. We've then priced the stock market in Euros to see the overall performance to see whether it's deflationary or inflationary in nature. Since we're seeing new highs being made in the stock market it's also bullish for our EURUSD which is great.

Overall, majority of our factors considered in the analysis have signalled an upwards move. Now it's to check market sentiment and price to see if this is the right time.

The next step we're going to take is to check market sentiment, what are the big boys doing with their money?

Commitment of Traders - Open Interest Analysis

What are hedge funds doing with the Euro? Buying it. Their overall net open interest in the pink line is above 0 which means their consensus is to long the euro. Let's take a flip look on the USD to see if they're agreeing or disagreeing.

USD positions for hedge funds are quite the opposite, two weeks ago their consensus was to short the USD. They're now getting a bit closer to 0 but still overall in a negative open interest. We'll see if next week continues to stay negative or not as this could impact the overall move.

Price Trends

Overall, the EURUSD price chart has been on an uptrend since COVID19. It seems the feds reaction and quantitative easing have weakened the dollar heavily during the pandemic which indirectly has caused the Euro to strengthen against it.

In my personal opinion we're going to see some congestion moving towards this "sell zone" that most traders will see. However, as traders start seeing this resistance level getting hit we'll see a lot of sell positions rack up on sentiment bars. These will likely get stopped out as EURUSD smashes through new highs, especially if the new strain of COVID19 affects the US even more.

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