The past few months seemed to be marked by the weakness of the U.S. dollar, which the euro gained, among others. The turning point was March and the biggest impact of the epidemic on financial markets.
From the third month of 2020 until today, the euro seems to be gaining against the US dollar, and the EUR/USD exchange rate rose from 1.06 to 1.23 USD. This means that the euro has strengthened by almost 16 percent. The last time we saw such an appreciation of the common currency was in 2017. Nevertheless, it seems that the strengthening cycle observed since March may slowly come to an end, and the first quarter of 2021 may bring a correction in the EUR/USD market. In addition to the largest wave of appreciation in three years, the correction may also be supported by what is happening on the CME euro futures contracts. Even before the trend change, in February, the largest number of short positions on the euro since 2015 could be observed. According to the CFTC commission data, there were over 270 thousand short positions open at that time, which could indicate that anyone who wanted to invest for the decline in the value of the euro already had such a position open and it was difficult to find new investors willing to join the trend.
The pandemic, which hit the markets, turned the aforementioned positioning upside down and in August only 50 thousand of 270 thousand short positions were left, which is the least for at least a decade. In the same month, in turn, the largest number of long positions on euro contracts was observed, amounting to over 260 thousand, according to the COT report. This meant the largest commitment to the euro exchange rate increase in at least 10 years. So, as you can easily see, this market has been moving from one extremity to another in recent months. Therefore, while currently remaining relatively high, it may be preparing for correction.
The theoretical places of potential resistance to the trend may be in the area of 1.24, and in this quarter the target for correction may be around 1.17-1.16. If the EUR/USD exchange rate were to fall back, a clear strengthening of the USD to PLN would also be possible. The zloty is not supported by the recent interventions of the National Bank of Poland and the possibility of interest rate cuts in this quarter. Therefore, with a fall of EUR/USD, the USD/PLN could increase to 3.90.
A possible corrective strengthening of the USD on a broad market would be a good test for commodities or stock markets, because usually a weaker USD helps them, and with a stronger USD, commodities and stocks often fall. However, if these markets were resistant to the strengthening of the dollar this time, it could indicate their very high strength.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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