EUR/USD: short covering in the dollar, EUR headed to 1.1662? - Rabobank

Analysts at Rabobank noted that EUR/USD has pushed through the lower boundary of the ascending channel around the 1.1830 level.

Key Quotes:

"A close below this level would present a negative signal for the currency pair, at least in the short term, and question whether the rally that has extended through most of the year has run out of steam." 

"Although Eurozone politics may yet have more populist and right-wing bombshells to give, the region can still offer strong economic growth. The environment of strong growth and low interest rates is an attractive one for investment and should, in theory, offer continued support to the EUR.  That said, a lot of good news is in the price.  In recent months the market has been pricing in the likely start of a QE tapering programme by the ECB in 2018.  The better economic outlook in the region in addition to the steady political backdrop has persuaded speculators to change the habit of many years and switch from holding net short EUR positions into net longs.  However, now that the market is long EUR, there is the greater risk of profit-taking on any negative developments such as a souring of the political backdrop."

"Just as the speculators built long net EUR positions this year, they moved into short net USD positions. A lack of progress on fiscal reform by the Trump administration coupled with a suspicion over whether the Federal Reserve can live up to its projections on policy tightening has resulted on the USD being the worst performing G10 currency this year.  Last week, however, the Fed indicated that it was still on course for hiking rates once more this year which lent the USD some support.  Although we expect that steady rates will prevail in the US through the rest of the year, positioning does imply that the greenback may be ripe for a bout of short-covering. "

"From a technical perspective this morning’s break below the EUR/USD1.830 area signals a change in sentiment for the currency pair. A close below this level would confirm a bearish outlook and expose the August low at 1.1662 as the next technical target.  This undermines our fundamentals based outlook.  It has been our view that EUR/USD would consolidate in the 1.1900 area near-term before pushing towards the 1.22 level on a 6 mth view.  We haven’t yet changed this medium-term target given that the current bout of position adjustment was arguably overdue.  That said, the souring of political sentiment in EUR does pose a significant risk to this forecast."