EUR/USD resumed higher in the past week to gain 2.5% which was the largest weekly advance since February 2016. The pair pushed to seven-month highs despite last week’s bearish engulfing weekly print and has advanced in five out of the past six weeks for an accumulative gain of 5.8%.
Losses that followed the US election were completely erased following last week’s rally with bullish sentiment rising at a rapid pace which is evident from both price action and positioning.
The COT report revealed non-commercials had shifted to a net long for the first time in two years in the prior report and the latest report showed follow through with a significant weekly build.
In the week to May 19th, non-commercials were reported to hold the euro net long by $5.21 billion, up $2.17 billion from the prior week.
The US dollar index (DXY) dropped to six-month lows in the past week but positioning in the dollar does not point to a clear shift in sentiment. An aggressive loonie short build and a notable addition in the yen net short has offset sentiment shifts in the euro and pound, resulting in a weekly build for the aggregate US dollar net long.
The US dollar net long stood at $12.44 billion as of the report cut-off date which reflects a weekly increase of $2.53 billion. It is unusual to have both the euro and dollar held net long and it’s unlikely this will be sustained over the long run.
Last week’s euro positioning shift was attributed entirely to a short covering as there was a marginal draw in long contracts. The latest report shows a build in long contracts and a draw in short contracts.
EUR/USD has been influenced by US politics which will continue to impact the currency pair. However, monetary policy will come into focus with two weeks remaining prior to the Fed blackout period ahead of the June meeting.
Comments from Fed members Mester and Bullard have given early indications that there may be a split among the FOMC as Bullard argued that the path of normalization may be too aggressive while Mester warned about risks associated with waiting too long.
The Federal Reserve was optimistic in the statement that followed the last meeting, dismissing some softer economic data by focusing on the strong labor markets. The statement provided little reason to believe the central bank would not raise again in June.
Minutes from that meeting will be released in the upcoming week and should reveal if there is a division among members. The futures market has been consistent in pricing in a 78.5% chance of an increase in June over the last three weeks, which points to downside risk in the event the Fed shifts its stance.
The meeting minutes may contain clues as to what the Fed intends to do but a stronger signal is likely to come from Fed member speeches. The focus will tend to be on the intentions following the June meeting as the markets are showing little doubt that the Fed will proceed to hike at the next meeting.
Other data releases that stand to have a high impact on EUR/USD in the upcoming week include US durable goods orders and the revision to first quarter GDP, both scheduled for release on Friday.
The EUR/USD daily chart shows strong upside momentum. Combined with bullish sentiment seen from aggressive euro long positioning over the past two COT reports, there is little reason to expect a bearish turn in the week ahead, from a technical perspective.
The weekly chart, however, shows the pair approaching resistance at 1.1457 which is considered a major level as it has held EUR/USD lower since 2015 on several attempts. Adding confluence to the horizontal level is the upper line of a declining channel that connects the 2015 high with the 2016 high which is best seen on a weekly chart.
While this resistance confluence is still 250 points away, the risk to reward appears less favorable from current levels and a slowing of upside momentum appears likely, in the absence of a fresh fundamental driver.
Important resistance in the upcoming week falls at 1.1299 which marks the spike high from the US election. There may be a marginal breach above the level to shake out weak positions but it remains pivotal for a near-term directional bias. Support is seen at 1.1142 which marks the high shortly ahead of the US election.