The EURUSD Is Forming an Extreme Reversal

The U.S. Dollar is weakening this week, with the Dollar Index (DXY) losing 0.63% to 106.83 points, while the EURUSD is rising by 0.9% to 1.05100. Last week, the EURUSD traded sideways around 1.05000 before the release of Eurozone business activity data. Manufacturing PMI fell to 55.2 points, below the consensus of 46.0, while Services PMI dropped into contraction territory at 49.2 points, down from 51.6 points.

This disappointing data sent the Euro down by 1.6% to 1.03310 against the Dollar. In contrast, U.S. business activity has shown signs of improvement. Manufacturing PMI rose to 48.8 from 48.5, and Services PMI unexpectedly surged to 57.0 from 55.0, marking its highest level since March 2022.

Despite this, the EURUSD began to recover, closing last week at 1.04120. The recovery was driven by U.S. President-elect Donald Trump's nomination of hedge fund manager Scott Bessent as Treasury Secretary. This appointment signalled potential import tariffs targeting China, which reinforced expectations of further Federal Reserve rate cuts. U.S. 10-year Treasury yields fell to 4.26% from 4.41%, while the probability of a quarter-point Fed rate cut in December increased to 59.6% from 52.7%.

The EURUSD opened this week with a gap, climbing 0.64% to 1.04770. During Monday's session, the pair rose further to 1.05290, forming an extreme reversal pattern. The sharp decline on Friday forced Dollar short-sellers to capitulate, a move often preceding significant reversals. If the upward trend persists, the primary target for the pair is 1.05500-1.06500, with a secondary target at 1.09500-1.10500.

Trump’s recent announcement of additional tariffs also impacted the Dollar. He pledged a 10% tariff on Chinese imports and a 25% tariff on goods from Canada and Mexico, effective from his inauguration on 20th January. This news briefly supported the Dollar, pulling the EURUSD back to 1.04240 and closing Monday’s gap. However, the pair regained momentum and traded above 1.05000 by Tuesday.

As this is a shortened trading week in the U.S. due to the Thanksgiving holiday, significant movements are expected to occur by Wednesday. The FOMC Minutes, set for release on Tuesday, will shed light on the Fed’s rationale behind November’s quarter-point rate cut and may hint at a potential pause in December. Additionally, Wednesday will see the release of key economic data, including Q3 GDP, the PCE Index, and initial jobless claims, which are anticipated to suggest a modest slowdown in the U.S. economy.

Large investors appear to be adjusting their positions against the Greenback. The WisdomTree Bloomberg US Dollar Bullish Fund (USDU) reported net inflows of $2.8 million last week, though a $3.5 million open position against the Dollar at 1.09000-1.09380 remains. If Dollar weakness persists, these investors may amplify their bets against it.