This month I have chosen to do an article that covers both the technical and fundamental analysis of the EURUSD. I have chosen this market pair because it is one of the most traded pair in the currency market, and is a market that is linked to two great world economies: the United States of America and Europe.
For most of 2014 and a large part of 2015, the United States Dollar has been making a lot of gains. The reasons for this gain vary from the low oil and commodity prices to the steady flow of positive fundamental data that was coming out of the states.
On the eurusd, the dollar gain was felt more in 2014; this was around the time the United States Federal Reserve Bank cut back on its quantitative easing program, and started contemplating increasing its interest rates. During this period, European Central Bank (ECB) also started its own quantitative easing program, which had a very strong bearish effect on eurusd. The eurusd formed a very steep bearish channel which lasted for several months.
Moving forward into 2015, eurusd made a low at 1.0500 and formed a very tight range which lasted for many months. During the period, the Federal Reserve Bank dropped many hints on when it would increase the interest rates, and this put the euro under a lot of pressure and helped the dollar gains.
Fast forward to December of that year, the ECB dropped a bombshell saying they would not be expanding their Quantitative easing budget, this was a big surprise and the euro gained significantly.
Quantitative easing as a general rule leads to a currency's weakness, because the Central bank is pumping liquidity into the economy in a bid to cause economic growth, and excess liquidity reduces the demand for the currency. So when the European Central Bank decided not to expand its Quantitative easing program, this gave the euro a big boost. The same way the United States Dollar started gaining in value when the Federal Reserve Bank started cutting down on its quantitative easing program.
On the monthly eurusd chart, a tight market range formed which coincided with another tight range on the daily chart.
The two ranging markets from both time frames was the first indication of an imminent price breakout. Applying our trend lines, we saw a very interesting triangle wedge form on the daily chart, as the width of price movement narrowed.
The big question then was in which direction the breakout was going to occur.
The breakout eventually occurred on the 3rd of February 2016, when price broke through the trend line and headed North.
There are a couple of reasons why the eurusd bulls over the eurusd bears:
- The European Central Bank's decision not to expand its Quantitative easing program; this was a big upset as everyone thought they would.
- The Federal Reserve Bank's decision to hold its interest rates: There were a lot of speculations about the Federal Reserve Bank increasing its interest rate, after keeping it so low for many years; so it was no big surprise when the interest rate was increased from 0.25% to 0.5% in the month of December 2015.
So it is clear why we have the eurusd bulls behind the driver's seat. I want to stress that this market is currently in a breakout region and could still go much higher. Two major trend lines have been broken within the last couple of days at points A and points B, and the market still has enough momentum to test previous highs.
I hope this article has been informative and enjoyable; I would be happy to receive comments and observations. I wish you all a prosperous trading month.