EUR/USD rally cools, pair consolidates in 1.1450 area as traders assess whether dollar long-squeeze is done

• EUR/USD buying hit overdrive on Wednesday, but the pace of gains has been more measured on Thursday.
• The pair is now consolidating in the 1.1450 area as traders assess whether the recent dollar long-squeeze is over.

After EUR/USD buying hit overdrive on Wednesday as the pair shot back above the 1.1400 level, the pace of gains has been more measured on Thursday. While the pair continues to trade with modest gains of about 0.1% on the day just above 1.1450, it has backed off from earlier highs in the 1.1480 area. But EUR/USD is still up about 0.8% on the week, with the euro benefitting in tandem with the rest of its G10 peers, on a recent surge in US dollar weakness.

Dollar weakness this week has come despite Fed Chair Jerome Powell on Tuesday (and other Fed members this week) endorsing the outlook for multiple rate hikes and likely quantitative tightening in 2022. It has come despite Consumer Price Inflation data on Wednesday showing price pressures at a fresh multi-decade high at 7.0% YoY and Producer Price Inflation data on Thursday hitting a new series high at 9.7% YoY. The non-intuitive move lower in the buck that has so benefitted EUR/USD this week appears to have been a function of profit-taking/a long squeeze, as well as technical factors.

Note that, according to the US CFTC, International Monetary Market speculators finished 2021 with a net long position in the US dollar that was near the largest is had been in two years. Crowded long-positioning seems to have taken a battering this week, thanks in part to technical buying in EUR/USD after it broke above the key 1.1380 resistance area (the late November/December highs) on Wednesday. Note that during the month of December, EUR/USD had formed an ascending triangle, which often portends a bullish breakout.

The technical play from here would often be to wait for a retracement back to the original level of resistance (at 1.1380) and rebuild longs in the hope the level will now provide solid support. But with the case strengthening for a stronger dollar this year as the Fed becomes more hawkish and inflationary conditions remain hot, the fundamentals may be pointing towards a drop back towards November/December lows in the 1.1200 area over the course of Q1.