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16.05.2022 08:12 AM
EUR/USD: plan for European session on May 16. COT report. Bulls to hardly protect yearly low

On Friday, a trading day began on a positive note, but its end was really gloomy. Let us take a look at the 5-minute chart to clear up the market situation. Earlier, I asked you to pay attention to the level of 1.0420 to decide when to enter the market. The euro jumped to the resistance level of 1.0420 amid an insignificant drop in the eurozone industrial production and quite positive data on France's and Spain's inflation. However, the single currency failed to climb above this level. A false break at this level led to a good short signal. As a result, the pair dropped to the support level of 1.0377, thus allowing traders to earn 40 pips. A false break of 1.0377, which gave a buy signal, enabled the euro to climb by 25 pips. In the second part of the day, the euro returned to 1.0377. A false break of this level led to a buy signal. A break and an upward test of 1.0377 gave traders a good sell signal. However, data on the US consumer sentiment disappointed traders, thus causing a drop in the US dollar and a rise in the euro.

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Conditions for opening long positions on EUR/USD:

Today, representatives of the ECB are planning to provide comments that may boost the euro. However, the euro will hardly trade above the resistance level of 1.0424 for a long time. This level is capping the upward potential of the pair. Confidence of buyers of the euro could be affected by absence of important macroeconomic reports from the eurozone. Today, buyers should firstly protect the intermediate support level of 1.0388. If the pair drops amid the eurozone trade balance report, only a false break of this level will give a perfect buy signal, thus allowing the pair to recover to 1.0424. A break and a downward test of 1.0424 may provide a new long signal, allowing the pair to increase to 1.0463, where it is recommended to lock in profits. A farther target is located at the high of 1.0512. However, it will be difficult to reach this level amid the necessity of a more aggressive approach of the Fed. If the euro/dollar pair declines and buyers fail to protect 1.0388, it will be better to avoid long positions. Traders may go long after a false break near the yearly low of 1.0353. However, I do not recommend betting on this level. Traders may open long positions from 1.0306 or lower – from 1.0255, expecting a rise of 30-35 pips

Conditions for opening short positions on EUR/USD:

Traders may continue selling off the euro in case of dovish comments from the ECB. Today, bears should protect the nearest resistance level of 1.0424. The pair is approaching this level at the moment. A false break of this level may return pressure on the euro and push it to 1.0388. If bulls do not show activity at this level, the euro is likely to make an attempt to hit a new yearly low in the first part of the day. A break and settlement below 1.0388 as well as an upward test of this level will give a new sell signal. In this case, the pair may decline to a new yearly low near 1.0353, where it is recommended to lock in profits. A farther target is located at 1.0306. If the euro/dollar pair jumps amid strong eurozone data and bears fail to protect 1.0424, nothing important will happen. However, the pair may show a sharper rise. Under the current conditions, it will be better to open short positions after a false break of 1.0463. Sell orders could also be initiated from 1.0512 or higher – from 1.0575, expecting a drop of 30-35 pips.

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COT report

According to the COT report from May 3, the number of short positions surged, whereas the number of long positions declined. The recent announcements made by central banks spurred a sell-off of risk assets. The fact is that it became obvious that developed economies will hardly avoid grave problems. A sharp increase in the US key interest rate by 0.5% made investors focus on the US dollar as a safe-haven asset. High inflation is a serious problem not only for the US, but also for the whole world. In addition, rapid tightening of the Fed's monetary policy is making the greenback attractive for investors. The ECB President also pinpointed the necessity of a faster change in monetary policy. It is expected that the central bank will discontinue asset purchases by the end of the second quarter of the year. The first key interest rate hike is planned to take place this autumn. While the ECB is just planning, the Federal Reserve is taking measures. Against the backdrop, the greenback is becoming more and more attractive. However, a lot will depend on the US inflation report and market reaction. If inflation falls a bit, pressure on the euro may become weaker, thus boosting risk assets and allowing the euro to form an upward correction. In the latest reporting week to May 5, the number of long positions dropped to 208,449 from 221,003, whereas the number of short positions soared to 214,827 from 189,702. Notably, the euro's low price is making it attractive for traders. That is why the asset remains in demand despite the dominance of the bearish sentiment. According to the week's results, total non-commercial net position decreased to -6,378. The weekly close price slumped to 1.0545 from 1.0667.

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Signals of indicators:

Moving Averages

Trading is performed near 30- and 50-day moving averages, thus pointing to an attempt to form a bullish correction.

Note: The period and prices of moving averages are considered by the author on the one-hour chart that differs from the general definition of the classic daily moving averages on the daily chart.

Bollinger Bands

A break of the lower limit of the indicator located at 1.0375 may cause a new decline in the euro.

Description of indicators
  • Moving average (moving average, determines the current trend by smoothing volatility and noise). The period is 50. It is marked in yellow on the chart.
  • Moving average (moving average, determines the current trend by smoothing volatility and noise). The period is 30. It is marked in green on the graph.
  • MACD indicator (Moving Average Convergence/Divergence - convergence/divergence of moving averages). A fast EMA period is 12. A slow EMA period is 26. The SMA period is 9.
  • Bollinger Bands. The period is 20.
  • Non-profit speculative traders are individual traders, hedge funds, and large institutions that use the futures market for speculative purposes and meet certain requirements.
  • Long non-commercial positions is a total number of long positions opened by non-commercial traders.
  • Short non-commercial positions is a total number of short positions opened by non-commercial traders.
  • The total non-commercial net position is a difference in the number of short and long positions opened by non-commercial traders.
Miroslaw Bawulski,
Analytical expert of InstaForex
© 2007-2024
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