To many, the bearish scenario on the EURUSD presented below will sound unusual. After all, this is one of the currency pairs that performed the best in 2020.
What needs to change for the EURUSD to drop back below 1.10?
In fact, the target seen below is mandatory, should the technical picture be correct. If that is the case, not only that the EURUSD will drop below 1.10, but there is scope for even further decline in the future.
Both technical and fundamental factors help. But above all, this setup is technical. On the technical part, the EURUSD 2020 price action suggests a triangle of a bigger degree.
The clue for such a triangle comes from the elongated flat pattern that ended in June 2020. Such a pattern appears only in triangular patterns. The only catch here is that this triangle forms on bigger timeframes. Hence, a dramatic move below 1.10 may look significant, but on the bigger timeframes is not.
Fundamental Analysis Points to a Weak Euro As Well
Euro area GDP contraction for the year was further revised to the downside. Now estimated at -7.7%, the risk is that it will be revised even lower.
Inflation is nowhere near the ECB target. In fact, it threatens to fall deeper below zero. With the deposit facility rate already in negative territory for several years now, the ECB has no option but to further ease, this time via even more QE.
Europe is in lockdown mode – the US is not. Hence, even if a vaccine comes faster than expected, the US will benefit from more time without “European style lockdowns.”
Finally, the rotation into the USD might have just started. A possible tech sector bubble will push USD even higher.
EURUSD – Leg of a Contracting Triangle Underway
Besides all the reasons to sell the Euro from a fundamental perspective, the technical one is more appealing. Because the risk-reward ratio exceeds the regular ones, the trade makes sense from a medium to long-term perspective.
However, do not expect the EURUSD to waste its time to reach below 1.10. If the market indeed forms the last leg of a contracting triangle, it should reach that level in less than the time it took the d-wave (in blue) to form.
Hence, bears may want to stay short for 1.10 with a stop at the 1.20 highs and wait for the e-wave to drop below the c-wave – a very common move during non-limiting triangular patterns.
On the price trading above 1.20, the pattern will be void.