COMMENT-January correction has refreshed EUR/USD downtrend

The correction this month has refreshed the EUR/USD downtrend which is supported by changing interest differentials that could lead the pair below parity this year.

The sell-off from 1.1214 to 1.0177 has taken the pair well below the 1.0448 low reached in the last two years.

Although EUR/USD has broken lower out of ranges in which was entrenched for two years there has been little interest to sell it. Bets against the euro are less than one third of those established during the eurozone crisis yet the pair has already fallen much further than its low point in 2015 at 1.0457.

With little to restrain it, this decline can go further. This month’s minor correction – between 23.6% and 38.2% of the 1.1214-1.0177 drop – provides the foundation for an extension lower.

Short covering during January’s pullback has reduced an already modest net short position, and alleviated the oversold situation that prevented a deeper decline earlier this month.

The pair was briefly overbought at the 1.0535 peak of this minor pullback and, given the subsequent drop to 1.0412, EUR/USD may have already reverted to the downtrend.

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