Major bull/bear battle could be brewing for EUR/USD

The US dollar was lower against all major pairs in midday New York trading, with euro bulls pushing strongly toward a test of major resistance levels.

President Trump held an unscheduled meeting with US Federal Reserve chairman Jerome Powell Monday morning, which surprised markets. The US dollar weakened as traders suspected that Trump used the meeting to put pressure on Powell to ease monetary policy more aggressively. The president has been calling publicly on Powell to lower interest rates for many months.

Critical test

The $1.12 EUR/USD level remains the critical test, and if the euro can push past that level it will mean a breakout of the range of $1.10 to $1.12 that EUR/USD has been trading in since early October.

While US dollar bulls have offered scant resistance to the euro’s climb in recent sessions, they may be saving their ammunition for a defense of levels around $1.12, suggesting that a major battle between euro bulls and bears may be in store for later this week.

EUR/USD traded as high as $1.1090 Monday in North America and was settling in near 100-day support of $1.1070 in late trading.

Growing consensus

There is a growing consensus that fundamentals are shifting somewhat in the euro’s favor. Economists are seeing a possible bottoming out of the downturn in euro area growth this year. Recent news showed that Germany, the euro area’s largest economy, avoided falling into recession in the third quarter, though by the narrowest of margins.

A great deal of media attention was paid Monday to a bullish euro forecast by US investment bank Morgan Stanley, which says going long EUR/USD will be one of the best macro trades over the next year.

Morgan Stanley sees economic growth differentials between the euro area and the US narrowing in coming quarters, which will favor the euro.

The investment bank also expects that moves by the US Federal Reserve to add funds to US money markets, which is being done to avoid a repeat of a grave market squeeze that occurred in September, will result in a glut of US dollar liquidity that will benefit the euro starting early next year.

Elliott Wave turning big-time euro bullish

Analysts that have expertise in the Elliott Wave branch of technical analysis have been turning increasingly euro bullish in the latest quarter, and most are pointing out now that the early November weakness in EUR/USD is likely temporary and not a reversal of the strong euro bull move throughout most of October.

Elliott Wave analysts are generally looking for a euro push past $1.12, reinforcing the view that this week may be pivotal for EUR/USD. Forecasts differ somewhat but suggest that when resistance around $1.12 is breached in a meaning full way that the area around $1.18 may be the next stop.