The EUR/USD traded in the range between 1.108 and 1.1189 dollars per euro on Thursday, after the U.S. Commerce Department said retail sales increased 0.6% in July, in line with economists' expectations. The core retail sales, excluding automobiles, gasoline, building materials and food services, rose just 0.3%, missing the forecast of a 0.5% gain. 

The EUR/USD has been on the rise as it surged 1.57% on Wednesday to an intraday high of 1.1213 dollars per euro, or 61.8% Fibonacci retracement level, after the People’s Bank of China (PBoC) devalued the yuan against the U.S. dollar for the second day. The China renminbi (CNY), or Mainland yuan, traded against the U.S. dollar as low as 6.4474 yuan per dollar on Wednesday, down 1.96% from the previous close. On Tuesday, the PBoC pegged the yuan to the U.S. dollar at a new daily reference rate of 6.2298 yuan per dollar, compared to 6.1162 on Monday, and lets it trade as much as 2% on either side of what is known as the parity rate. 

The yuan devaluation caught the hedge funds by surprise as they were piling into euro short positions ahead of the PBoC announcement, according to the Commitment of Traders (COT) data released last Friday. From U.S. Census Bureau data, the U.S. exported goods and services of about $55.9 billion to China so far this year until the end of June, while imports were as much as $226.7 billion, resulting in a trade deficit with China of $170.8 billion. The trade gap is expected to widen further as a result of the yuan devaluation, meaning a weaker dollar is ahead.

The weakening dollar could be attributed to the U.S. Job Openings and Labor Turnover Survey (JOLTS) report, released by the Department of Labor on Wednesday, saying that the number of job openings rose to 5.25 million on the last business day of June, down 100,000 from the revised 5.35 million in May, missing economists’ forecast of 5.35 million job openings. The quits rate, which measures workers who voluntarily resign, held steady at 1.9%, meaning workers aren’t quitting their old job for a new one despite that job openings are at a near record level. The Federal Reserve likes this report because it helps confirm the trend in jobs.

As of August 4, there are 114,546 short positions of euro FX (CME:6E), traded on the Chicago Mercantile Exchange (CME), by leveraged funds, an increase of 10,195 short positions from the previous week. This is compared to about 40,472 long positions, up 2,612 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. Hedge funds have increased their net short positions about 7,583 contracts from the previous week, where euro FX contracts are traded in units of 125,000 euros. The euro’s strength could be due to hedge fund short coverage.

The rise in EUR/USD short positions could be attributed to a major push by investment banks on the idea of euro-dollar parity. Last month, Athanasios Vamvakidis, head currency strategy at Bank of America Merrill Lynch, told Bloomberg that, “The euro will fall to parity with the dollar by the end of the year … There's room for the market to join this trade.”. Mr. Vamvakidis practically said it is time to short the euro. Big bets might also have been put on the dollar trade since the FOMC meeting on July 29, as the Fed made it clear to the market that it will hike the rate this year, sooner rather than later.

Technically, the EUR/USD currency pair has made a bullish move after bouncing off the trendline support at the beginning of August. The EUR/USD just broke out the short-term symmetrical triangle as the yuan devaluation caught the hedge funds by surprise. The U.S. retail sales report was good, but not great. Hence, a breakout of the long-term symmetrical triangle is pending the release of the eurozone April-June GDP data due on Friday.

In the event of a long-term symmetrical triangle breakout, the EUR/USD will head back to retest the 1.14 dollars per euro level with the near-term key technical resistance at 1.12, or the 61.8% Fibonacci retracement level.