EUR/USD: Overbought After 1.15 Break; What’s The Trade?

EUR/USD made a big break and is already eyeing 1.16. Has it gone too far? Here is the view from Danske:

Here is their view, courtesy of eFXnews:

Danske Bank FX Strategy Research notes that EUR/USD has entered into an overbought territory after breaking above 1.15 overnight, driven by general USD weakness after Republican Senate majority leader Mitch McConnell announced that the US healthcare reform is effectively dead in its current form.

Positioning, technical (RSI) and short-term valuation indicate rising headwinds for EUR/USD near term.

“1- Non-commercial EUR/USD positioning is approaching stretched long territory, according to IMM data, suggesting the EUR/USD rally could lose momentum near term.

2- We note that EUR/USD is now significantly overbought according to our short-term financial model, trading 1.3 standard deviations above the model’s short-term fair value estimate of 1.1287 (spot at 1.1520).

3- EUR/USD also looks increasingly overbought according to other short-term technical measures such as the RSI. Hence, positioning, valuation and technical all indicate that the EUR/USD rally is likely to lose momentum near term,” Danske notes.

What’s the trade?

Strategy-wise, Danske maintains the view that any dips in EUR/USD are likely to prove short-lived and still like to buy the cross on dips.

“Longer term, we still see the cross higher, targeting 1.18 in 12M. In our view, EUR/USD has the potential to rise towards the 1.20s as Fed-ECB divergence fades. However, the next move from current levels to, say, 1.20 will be more ‘demanding’ than the one from below 1.04 to 1.14 seen in H1,” Danske adds.