EUR/USD selloff looks overdone, whichever way you splice it

EUR/USD is currently on track for its fourth consecutive bearish week, which could be its first such sequence since September 2023. But given the lack of mean reversion over this period, I can honestly say it feels a lot longer than four weeks since the euro rout began. But it looks like mean reversion is now underway. But let us first step back to admire the view.

EUR/USD has fallen -4% from the September high to this week’s low, over a period of 17 trading days. To put this into perspective, the 17-day percentage of change (%ROC) reached its lowest level in 20 months this week. Prices were also hugging the lower Keltner band during the second half of the decline, with four three closes beneath it before momentum turned higher.

Zooming in shows that EUR/USD posted a decent bullish bar on Thursday, closed back inside the lower Keltner band and formed the final candle of a morning star pattern (3-bar bullish reversal). At the very least, it looks like EUR/USD wants to head for its 200-day SMA at 1.0870.

EUR/USD, USD index futures positioning – COT report:

It should also be remembered that large speculators remained net-long EUR/USD futures last week, even if only by around 17k contracts. Assert managers remain fully invested in Europe with a net-long exposure of 222.7k contracts. That suggests there could be a level of support for EUR/USD, even though short bets from both sets of traders are rising.

Something else to factor in is that the USD rally appears to be driven by short covering more than long initiation. Asset managers flipped to net-long exposure, although 5.5k short contracts were closed over the past week while only 1.6k longs have been added. We may see long increase in the coming weeks if US data continues to outperform, but for now I think we’re best being cautiously bullish EUR/USD towards the 200-day SMA and reassessing its upside potential along the way. 

EUR/USD technical analysis:

A bullish trend has emerged on the 1-hour chart, and prices have recovered back above 1.08. RSI (14) is confirming the rally, although close to the overbought zone. As there is no bearish divergence, it could allow for another crack at the 1.0830 highs before a pullback.

If prices retrace lower, there are several technical support levels just above 1.08 which includes the weekly S1 pivot, daily pivot and weekly VPOC (volume point of control). Any pullback towards this area could be of interest for bullish swing traders.

A break above the daily R1 (1.0848) opens up a run for the 200-day EMA.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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