Forex Analysis & Reviews: 23.01.2023 - EURUSD: Is it time for a...

23.01.2023 04:46 PM

EURUSD: Is it time for a correction?

There is nothing scarier than a crowd. A crowd that carries you in the direction it wants to go, not where you want to go. And the bigger it gets, the higher the chances are that all those people are wrong. This was the case in October, when the market was abuzz with pessimism. The energy crisis would finish off the eurozone and British economies, the pandemic would swallow China, and the Fed's most aggressive monetary restriction would sweep the U.S. off its feet. The crowd was wrong, EURUSD reversed. Why wouldn't the major currency pair do it now?

Indeed, the situation has turned upside down in less than four months. The number of "bullish" forecasts for the euro is dizzying. MUFG puts $1.12 at the end of the year, Nordea and others are talking about $1.15. Thanks to good weather and low gas demand, the eurozone may avoid a recession. China has opened its economy despite COVID-19, and the likelihood of a soft landing of the U.S. economy is growing by leaps and bounds. At the same time, the U.S. bond market, which predicts a dovish Fed reversal as early as 2023, looks overly pessimistic. Stocks, on the contrary, are the optimists. The truth may actually be somewhere in between.

S&P 500 and Treasury yields

A strong external background will support the U.S. labor market and make wage growth and high inflation a long-term process. The Fed will hold rates longer than currently expected. This will allow U.S. Treasury bond yields to rise. Stock indices will face headwinds in the form of deteriorating U.S. macroeconomic statistics, weak corporate reporting, high Fed rates and capital outflows to Europe and emerging markets. They will look better than the U.S. As a result, the conjuncture that led to the USD index rally for most of 2022 will return.

The situation is aggravated by Greed. The change in the external background forced speculators to actively sell the U.S. dollar, whose net short positions reached their highest levels since June 2021.

Dynamics of the USD index and speculative positions on the U.S. dollar

Does the madness of the crowd mean that the EURUSD trend will break again? I don't think so. But it is likely that the time for a correction has come. That said, the euro is starting to look overbought and vulnerable not only on the short-term investment horizon, but also on the long-term.

This winter, the German economy survived without Russian gas thanks to good weather, reduced demand and LNG supplies from Norway and the Netherlands. However, the reserves of blue fuel in the latter two countries are rapidly declining, and it is necessary to look for new sources of energy. There is time, but will Berlin be able to accomplish the impossible?

Technically, EURUSD's inability to cling to the upper limit of the fair value range of 1.061–1.087, as well as the formation of a pin bar with a long upper shadow, are alarming signs. A fall below 1.087 and 1.083 could open the way for a correction.

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