EUR/USD – Back to 1.20?

EUR/USD – Back to 1.20?

Kathy Lien

EUR/USD – Back to 1.20?

EUR/USD will be the main focus for the next 48 hours with November PMIs scheduled for Thursday release followed by the German IFO report on Friday. Marginally firmer data is expected for Germany and softer numbers are expected for France but with industrial production and factory orders falling over the past month, we believe the risk is to the downside for the German and Eurozone reports. EUR/USD raced above 1.18 today on the back of a weakening U.S. dollar, less hawkish FOMC minutes and a small uptick in Eurozone confidence. According to Reuters, the ECB has no plans to change its guidance until late 2018, which is consistent with what we’ve heard all along from the central bank. That mattered little however to a currency pair that was driven entirely by the market’s appetite for U.S. dollars. While that will change tomorrow, there’s no doubt that the technical outlook for EUR/USD shifted with today’s break above the 50 and 100-day SMAs though low liquidity and holiday position adjustments make the move questionable. Until EUR/USD breaks above the November 17th high of 1.1822 in a more meaningful way, the bears still have a chance especially with fundamentals on their side.

Technically, the EUR/USD broke out today but its found resistance at the 2nd standard deviation Bollinger Band. Further more, in order for the downtrend to be erased, EUR/USD needs to break the November high of 1.1860.

RBA Meeting Preview

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The Reserve Bank of Australia meets tonight and new central bank governor is at the helm.  Phillip Lowe, former RBA deputy governor succeeded Glenn Stevens and investors will be paying close attention to the new governor’s tone. Chances are he is going to play it safe and maintain the central bank’s upbeat outlook.  The last time they convened they expressed confidence in the trend of growth and labor market.  When Lowe spoke last month, he said the labor market is not as strong as the unemployment rate suggests and inflation is expected to remain low for some time. Taking a look at the table below, there has been as much improvement as deterioration in Australia’s economy since the last monetary policy meeting with broad improvements in China.  So while RBA Governor Lowe may be optimistic, the main takeaway will be patience.  AUD may fall on this but at a time when the central banks of the U.K., Eurozone, Japan and New Zealand are considering more stimulus, a neutral bias will make any declines shallow. In fact we believe the better trade is to be long AUD pre-RBA.



Here’s How to Trade the Sept ECB Rate Decision

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The European Central Bank’s monetary policy announcement is the most important event risk on the calendar this week. Aside from the rate decision, the central bank also releases its latest economic projections which helps to shape future policy plans.  ECB President Draghi is expected to remind investors that inflation is low, the economy is weak and easier monetary policy may be needed. Consumer spending has been particularly soft, manufacturing and trade activity took a hit after Brexit and most importantly, inflation remains well below target with year over year core CPI growth slipping to 0.8% from 0.9% in August. However there have also been areas of improvement namely in business confidence, German spending and German stocks.  Some are hoping for more QE but at most we expect the ECB to extend its asset purchase program beyond March 2017.

As usual the EUR/USD there will be different phases to the currency pair’s post ECB reaction.  First, if there is no new QE, EUR/USD will jump. Then the second and more sustained reaction of the day will depend on the ECB’s guidance and their staff forecasts -- most likely these will be dovish which means weakness for the euro. However if there is no QE and Draghi stresses that they are in wait and see mode, the gains in EUR/USD will be sustained and of course if there is new QE, EUR/USD will drop to 1.11.