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Given the strong upside momentum seen on the daily and weekly charts, I feel EUR/USD can trade through the 1.4000 region in the short term, and potentially moving as high as 1.4100.
I will look at long positions on a daily close (08:00 AEDT) above the 61.8% retracement of the 1.4940 to 1.2043 sell-off at 1.3833 and place a stop loss below the January 28 high.
Looking at the daily MACD, RSI or stochastics or even price action in the daily or weekly candles, there are no obvious signs of a reversal on the cards.
The five-, ten- and twenty-one day moving averages are all aligned and headed north, highlighting the strong trend higher.
There is also downtrend resistance drawn from the 2008 high at 1.3960, so for traders who think short EUR/USD positions are the way to go, they could look at shorting at current levels, given Friday’s rejection of the 1.3833 (Fibonacci level), with a potential stop at 1.3970.
I however don’t want to fight the trend and feel waiting for confirmation of a close through supply at 1.3833 is the way to play the trade; I’m prepared to accept a higher (or worse) price.
Fundamentally there is a nice mix of both EUR strength and USD weakness. On the EUR side there is the perception that European banks could look to sell distressed assets ahead of the ECB bank asset quality review in October 2014. The key here is that some of the assets will be outside of the EMU and therefore when it does sell these assets, some of the proceeds will need to be repatriated back to the EMU, causing EUR inflows.
On the USD side, the Fed meeting on Thursday is key. The big issue for the USD comes if the Fed alters its stance on its current $85 billion asset purchases programme. As things stand the market feels the Fed will lower the monthly pace of bond buying in March, however there have been growing calls for this to materialise in June. Some are now even calling for increased easing, and therefore if the Fed outlines that it could increase or decrease bond purchases, then we could see the USD push through 1.3833 and onto 1.40.
If the Fed continues with its view that the recent FOMC was a close call and that many within the Fed are still looking to taper despite the trend in weaker data, then that could be USD positive, especially given the market’s positioning against the USD. Positioning against the USD and the negative sentiment here is probably the number one risk to the trade.
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EUR/USD chart below