US stock markets moved up nicely yesterday for the second day in a row, after comments from Russian President Vladimir Putin downplayed the extent of military action in Ukraine and US housing data boosted stock market optimism. Putin said “we don’t want to split Ukraine up, we don’t need that,’’ and later, “Don’t believe those who scare you with Russia, who yell that Crimea will be followed by other regions.”
In contrast, EURUSD had an unsteady day, dropping below 1.39 in the morning before reversing its losses, bouncing back off of the first support level and closing back above 1.39. The outlook for EURUSD now looks interesting and six straight weeks of gains means the currency could be near a potential turning point.
Outlook for EURUSD
As you can see from the weekly chart below, EURUSD has recently broken through a descending triangle pattern to the upside. This is a bullish signal for trend followers who may see the breakout as confirmation of a multi-month upward move towards 1.45. I see the chances of this move developing at around 30-40%. However, I also believe we will see a decent correction before this move get’s going. This correction is likely to whipsaw trend followers who blindly enter the market following the breakout.
As I mentioned already, EURUSD has now moved higher for 6 weeks in a row and this could well be week number 7. This has led EURUSD into an overbought condition whereby most traders have moved to one side of the trade.
In fact, open position data from large forex broker Oanda, (below), shows that EURUSD is now the most one-sided of all the major currency pairs. As it stands, only 22.25% of open positions are now long trades with 77.75% short, showing a significant one-sided bias in the market. This is down from around 25% last week and coincides with EURUSD making another break for the 1.40 handle.
In my experience, when open position ratios move below 30% in either direction, a reversal is not too far away. In this case, the build up of shorts means that it will not take much for EURUSD to drop sharply.
Meanwhile, long traders will be waiting for the correction in order to add to their winning positions.
In conclusion, short term traders should be weary about entering into the trend here, as open position data and technical indicators point to a significant one-sided market. These moments normally require a sharp correction, to relieve the overbought condition, and this should see EURUSD fall back towards 1.37 over the next couple of weeks.