Published 01/08/2019

It is time to end our bearish stance on the EUR/USD. The most important currency pair confirmed our outlook. It trended down since we turned bearish in February 2018. The technical pattern is probably nearly complete at the time of this write-up despite slight extension potential.

We expect a significant US Dollar bottom right around the 1.10-1.11 area. The stage is also set from a behavioral angle as sentiment rebounded into slightly US Dollar bullish territory. Many market participants are calling for a strong US Dollar rally continuation at this point in time. We take the contrarian stance. Sentiment has lots of room to shift past the bearish readings recorded in early 2018. The US Dollar has a lot of room to weaken versus the Euro. The risk/reward is clearly skewed in favor of a US Dollar depreciation.

The vast majority of market participants seek fundamental explanations that can stimulate their understanding. Most recently, the US president began attacking the Euro’s development versus the US Dollar. Although Trump is polarizing with regard to his policy, he follows his agenda. The EUR/USD rate seems to have made it on that list. The fundamentals are not far away from a similar situation that led to the Plaza Accord in 1985.

Fundamentals explain long-term relationships. Meanwhile, asset prices tend to deviate from their fair fundamental value substantially. Behavioral factors are most likely the cause for cyclical oscillations around the mean. These unfold probably in trends that are caused by feedback loops. Breaking above 1.11 is the first signal for a trend break. It passes the ball to the bulls. They have the opportunity to score a reversal of multiple degrees.