The size of EUR/USD short positions became visible this morning when we saw a 150 pip recovery for the pair, driven by nothing other than that someone took profit and those being a bit late, stopping themselves out. While almost all indicators we follow point to a lower EUR/USD, the sheer length of the move seen can be either measured from ten months ago, from year-end or over the last two weeks and in every case has been extraordinary – taking the pair down to levels not seen over the last 12 years.
There are many reasons supporting a continued move lower – the two main ones being the almost certain activity of one central bank – the ECB – and the likely activity of the other – the Fed. But, what the ECB is going to do we know and the risk of a surprise is low – hence what they intend to do should be priced in. The further move to the downside from what the ECB will do is a direct consequence of the volume of new euros coming to the market. That is a time factor.
In terms of the Fed there is an element of uncertainty – also linked to timing. We know that USD interest rates are bound to go higher – but we don’t know when. That element of uncertainty is still significant. Based on rather predictable central bank activities – or strong expectations to such – the market has been heavily positioned in EURUSD shorts. It has been a good run for many and while there is scope for more, time might be a stress factor for rather significant parts of these short positions. Many of them would prefer to reduce their exposure in anticipation or fear of corrections.
I think we saw a clear sign of such behaviour this morning and there might be more to come – from a need to reduce and not so much from a changed view of where we are going. The share volume of what is to be done will determine how far the correction will go. There is no price objective for such behaviour – just a need to trim the short. And when volume does that – then a correction will be in place until the volume is done.
I doubt few will go long in anticipation of how far a correction can go. I would be cautious about putting any technical reflections into my mind. It is all about clearing out the troubled ones and when done - then the correction is at the end.
A regain of previous significant resistance levels – like 1.09 and 1.12 and possibly also milestones like 1.10 might trigger tech freaks to aim for more. I think they represent new short entries by those with still some rooms within their limits.