Euro Looking Increasingly Vulnerable, Overall Sentiment to Stabilize after Wild Rides

Market overviews

Extreme volatility was seen in the markets last week, in particular in the across the broad rout in cryptocurrencies. Stocks the tumbled sharp but stage a late come back. Gold and silver resumed recent decline. Yen ended as the best performer, helped by both risk aversion and pull back in benchmark treasury yields. However, overall sentiments seemed to have stabilized with help from Fed’s clear communications. Yen could turn into range trading, experiencing counter forces of stabilizing risk sentiment and pull back in yields.

Also in the currency markets, Canadian and Dollar were the next strongest. Australian Dollar was the worst performing followed by Kiwi, and then Swiss and Euro. As risk sentiment stabilizes, the decline in Aussie and Kiwi could at least slow, with prospect of stronger recovery. Euro on the other hand, is starting to look increasingly vulnerable. It looks inevitable that Euro will break through 2017 low against Dollar soon. Also the path, there are downside risks in the common currencies in crosses too.

US stocks ready for oversold bounce as Fed outlined its plan clearly

Extreme volatility was seen in most markets last week, from stocks to cryptocurrencies, and to a lesser extent bonds and gold. But overall development towards the end provided hope of some stabilization, at least for the near term. Most importantly, after a chorus of Fedspeaks, the markets are now clear that Fed’s plan is to raise interest rate by 50bps in the upcoming meetings, until the outlook changes. Fed funds futures are pricing in 92.5% chance of a 50bps hike in June to 1.25-1.50%, and 86.7% chance of another 50bps hike to 1.75-2.00%.

With more certainty on Fed’s path, there should be some prospects of an oversold bounce (at least) in US stocks in the coming weeks. For example, S&P 500 has already hit target zone between 100% projection of 4818.62 to 4114.65 from 4637.30 at 3933.32, and 38.2% retracement of 2191.86 to 4818.62 at 3815.20. It has also defended 4000 handle swiftly. Stronger recovery through 4114.65 support turned resistance soon, to confirm short term bottoming at 3858.87.

NASDAQ could have formed a short term bottom at 11108.75 too, just ahead of 16212.22 to 12587.88 at 14646.90 at 11022.56. There is prospect of recovering back to 12587.88 support turned resistance and above, for the near term, as a consolidation at least.

10-year yield topped ahead of 2018 high, consolidations first

Meanwhile, 10-year yield should have topped for the near term at 3.167, with breach of 2.911 support, on bearish divergence condition in daily MACD. Resistance at 3.248 (2018 high) should prove to be too much for TNX, based on current situations. TNX would probably gyrate lower to 38.2% retracement of 1.682 to 3.167 at 2.599, which is close to 55 day EMA (now at 2.579). Downside should be contained there to set the range, as the corrective pattern unfolds. There is still prospect of break through 3.248, but only at the next stage of developments.

Dollar index ready to extend long term up trend to 108.43

Dollar index’s up trend resumed last week and hit as high as 105.00. This time, it’s primarily driven by the selloff in EUR/USD. For now, near term outlook will remain bullish as long as 102.35 support holds. Next medium term target will be 61.8% projection of 72.69 to 103.82 from 89.20 at 108.43. That will depend on EUR/USD’s final reaction to 1.0339 (2017 low).

Euro looking vulnerable in some crosses

Euro is an immediate focus for the week as selloff could quickly accelerate. Firstly, EUR/USD is in proximity to 2017 low at 1.0339. Decisive break there will resume the down trend from 2008 high at 1.6039, which started more than a decade ago. Secondly, Euro is also looking vulnerable in some crosses.

Most importantly, EUR/CHF could have topped at 1.0513, after hitting 1.0505 long term resistance and missing 100% projection of 0.9970 to 1.0086 from 1.0400 at 1.0516. That’s in form of a three wave corrective structure too, which affirms medium term bearishness. Firm break of 1.0369 will push EUR/CHF through 1.0186 support, for at least a retest of 0.9970 low. In such case, with reject by 55 week EMA too, EUR/CHF will likely be resuming the down trend from 1.2004 (2018 high).

The picture in EUR/AUD is similar. Corrective rebound from 1.4318 could have completed with three waves up to 1.5277, after missing both 100% projection of 1.4318 to 1.5053 from 1.4597 at 1.5332 and 1.5354 resistance. Firm break of 1.4982 low should set the stage for retesting 1.4318 low. IN such case, the down trend from 1.9799 (2020 high) is likely ready to resume towards 1.3624 long term support too.

EUR/USD Weekly Outlook

EUR/USD’s down trend resumed last week and hit as low as 1.0348. A temporary low is probably formed, just ahead of 1.0399 key support. Initial bias is turned neutral this week for some consolidations. But outlook will stay bearish as long as 1.0641 resistance holds. Decisive break of 1.0339 will carry larger bearish implication and target 161.8% projection of 1.1494 to 1.0805 from 1.1184 at 1.0069. Nevertheless, break of 1.0641 will indicate short term bottoming and turn bias back to the upside for rebound.

In the bigger picture, break of medium term channel support suggests downside acceleration. Current decline from 1.2348 (2021 high) is probably resuming long term down trend from 1.6039 (2008 high). Decisive break of 1.0339 will confirm this bearish case. Next target is 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. This will now remain the favored case as long as 1.0805 support turned resistance holds.

In the long term picture, current development suggests that long term down trend from 1.6039 (2008 high) is ready to resume. Break of 1.0339 will target 61.8% projection of 1.3993 to 1.0339 from 1.2348 at 1.0090. Decisive break there could bring downside acceleration towards 100% projection at 0.8694.