EUR/USD. Smart Money. The Bulls Are in Trouble

[Ben Graham]

The EUR/USD pair has been declining for the eleventh consecutive day. At the moment, quotes remain near "bullish" imbalance 9, which still allows for a potential reaction to this pattern eventually. Despite the persistence of the decline, it has been very slow. It is clear that the bulls have run out of fuel, while the bears have not visited the gas station either, so in any case the strength of the move is disappointing. Even today, when extremely important U.S. labor market and unemployment data were released, trading activity did not increase. It is even difficult to conclude that the bears are currently attacking, as a move of 20 points per day is hardly an attack.

Thus, I continue to wait for a bullish reaction to imbalance 9 until the invalidation of this pattern forces a conclusion that the bullish impulse has been canceled. Invalidation will occur below the 1.1616 level. This will not turn the trend bearish, but for some time the bears may seize the initiative. In this sense, only the bulls themselves can save the bulls. However, the bulls have been strikingly passive this week.

Two weeks ago, liquidity was swept from the swing of December 16, after which the decline of the euro currency began. Thus, chart analysis did predict a drop in the euro. However, the decline has been very weak, and the U.S. news background remains quite contradictory.

The chart picture continues to signal bullish dominance. The bullish trend remains in place, but traders now need new signals. Such a signal can only be formed within imbalance 9, but so far none has appeared. If bearish patterns emerge or bullish ones are invalidated, the trading strategy will have to be adjusted. At the moment, however, there are no grounds for this.

Friday's news flow added to traders' headaches. While the Nonfarm Payrolls report came in weaker than market expectations, the unemployment rate unexpectedly fell to 4.4%, and the previous month's figure was revised from 4.6% to 4.5%. As a result, the overall package of U.S. economic data can be considered positive for the dollar, which sharply reduces the likelihood of another easing of the Fed's monetary policy in the coming months.

The bulls have had plenty of reasons for a new offensive for the past three months, and all of them remain relevant. These include the (in any case) dovish outlook for FOMC monetary policy, Donald Trump's overall policy (which has not changed recently), the U.S.–China confrontation (where there has only been a temporary truce), protests by the American public against Trump under the "No kings" banner, weakness in the labor market, bleak prospects for the U.S. economy (recession), and the government shutdown (which lasted a month and a half but was clearly not fully priced in by traders). Thus, in my view, further growth of the pair will be entirely justified.

One should also not lose sight of Trump's trade war and his pressure on the FOMC. Recently, new tariffs have been introduced less frequently, and Trump himself has stopped criticizing the Fed. However, I personally believe this is yet another "temporary calm." In recent months, the FOMC has been easing monetary policy, which is why no new wave of criticism from Trump has emerged. That does not mean, however, that these factors no longer pose problems for the dollar.

I still do not believe in a bearish trend. The news background remains extremely difficult to interpret in favor of the dollar, which is why I am not trying to do so. The blue line marks the price level below which the bullish trend could be considered complete. The bears would need to push the price down about 300 pips to reach it, and I consider this task unachievable under the current news backdrop and circumstances. The nearest upside target for the euro remains the "bearish" imbalance at 1.1976–1.2092 on the weekly chart, which was formed back in June 2021.

News Calendar for the U.S. and the Eurozone:

On January 12, the economic calendar contains no noteworthy events. The news background will have no impact on market sentiment on Monday.

EUR/USD Forecast and Trading Advice:

In my view, the pair may be in the final stage of its bullish trend. Despite the fact that the news background remains on the bulls' side, bears have attacked more frequently in recent months. Still, I see no realistic reasons for the start of a bearish trend.

From imbalances 1, 2, 4, and 5, traders had opportunities to buy the euro. In all cases, we saw some growth. Traders also had opportunities to open new trend-following long positions after reactions from bullish imbalance 3, then after a reaction from imbalance 8, and later after a rebound from imbalance 9. Next week, a second reaction to bullish imbalance 9 may still occur. The target for euro growth remains the 1.1976 level. New long positions are acceptable if a new bullish signal forms. If not, the long strategy will have to be reconsidered.

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