Euro bulls face resistance, DAX 40 tests 2-month high
12:00, 10 November 2022
The euro has been picking up momentum in recent weeks, keeping away from recent lows. EUR/USD is battling with parity once again after finding support along a recent rising trendline but resistance at 1.0090 continues to cap the move higher. This is creating an ascending triangle within which buyers are gaining strength to break higher meaning we’ll likely see EUR/USD lows riding along the ascending trendline before nearing the peak of the triangle and breaking higher.
Of course, this afternoon’s US CPI data is going to be very important. After the NFP reading on Friday, traders will be looking for any sign of softening consumer prices to justify the need for smaller rate hikes at the Fed’s meeting in December. If this is the case, we can expect the dollar to sell off and EUR/USD to build above parity and retest the horizontal resistance at 1.0090. On the contrary, a stronger CPI reading will play into the hands of a hawkish Fed and likely dampen risk sentiment even further, meaning EUR/USD will deepen the losses over the coming days. As long as the pair remains below 1.01 the bears are in control and bullish momentum is at risk of faltering.
Another EUR cross that has managed to keep bullish sentiment going is EUR/GBP. The Bank of England’s gloomy outlook for the UK economy has kept the odds of another 50bps rate hike slightly subdued, especially after Governor Bailey made sure he let people know how he feels about the market-implied rate curve. In the press conference last Thursday he said, many times in fact, that the BOE believes the rate curve is way ahead of actual pricing, suggesting that the current 3% is much closer to peak rates than the 5% markets were implying prior to the meeting.
On the other hand, the ECB seems set on combating high inflation despite the potential of a recession as several policymakers, including President Lagarde, have indicated that rates will continue to rise aggressively until CPI shows signs of slowing and returning to the long-term goal of 2%.
This divergence in messaging has allowed EUR/GBP to build bullish momentum over the last few days, moving from below 0.86 to above 0.88 in the past week. Nonetheless, the move higher is in no way a one-way street as there have been clear shorting opportunities within the move higher. In fact, the pair is dropping heavily today, undoing most of the gains in Wednesday’s session and retreating back below 0.8750 as the euro weakens across the board. We can find the 50-day SMA in close proximity which may help stop the bearish move but the focus will be on the growth data in the UK out on Friday morning.
DAX 40 rally facing critical level
The bullish momentum in the DAX 40 (DE 40) has continued throughout the week. The strong rally on Friday helped cement the move higher and pushed the index into its key area of confluence (13,298 - 13,677).
This is an extract of the DAX 40 technical update I wrote last week:
“It’s hard to say whether the downside momentum that has dominated since the highs back in January is fully over, or whether this is an extended bear market rally that will give sellers a new opportunity to come in. So far, the three previous rallies within the descending wedge - marked by the green arrows on the chart - have stalled within the wedge, finding resistance on the upper bound of the pattern (the blue dotted line on the chart). So despite the pause in the rally so far this week, the technical setup looks good for a further rally if the 13,500 mark can be cleared by the close of the week. If so, the key area to watch out for with regard to resistance is the upper bound of the confluence area (13,677) given we have seen some rallies stall around this level in the past. From there, assuming DAX 40 buyers can gather enough momentum higher, something that won’t be easy, the focus will be on the 14,000 mark, which hasn’t been touched since the beginning of June and was key to stopping buyers breaking higher back in May.”
The move higher did in fact break above 13,500 by the end of the week and has now firmly broken away from the descending wedge pattern. As expected, resistance has been met at the upper bound of the confluence area (13,677) which has been stalling the move higher over the past three sessions. The key now is whether we can achieve a close above this area and how will momentum look after it. It's also important to note that we have managed to close above the 200-day SMA in the last three sessions which means that, despite its close proximity to the horizontal resistance (13,594), there is still enough appetite to move higher.
From here, as mentioned last week, the path is clear for the 14,000 mark, at which point we enter another area of confluence that was prominent back in the second quarter of this year. I would expect strong resistance within this path before being able to reach 14,500.