Is Euro Ready for a Bounce?

Chart Of The Day

After a near 800 point decline from yearly highs, the euro appears ready for a bounce. The pair has suffered everything from concerns over the slowdown of growth in the region to the upstart government in Italy that seems hellbent on challenging the norms of sovereign debt to the ever-tense relationship with the Trump administration.

But after so much selling most of the bad news has already been priced in and the pair found support today ahead of the 1.1700 level and bounced impressively. Wednesday’s EZ Flash PMI’s could show that activity in the region has stabilized providing a fundamental catalyst for more short covering. Meanwhile, the hammer forming on today’s chart shows that buyers have regained control and could squeeze the pair higher as the week proceeds.

End to EURO Run?

End to EURO Run?

Chart Of The Day

End to EURO Run?

EUR/USD had a great run this past week but the sell-off on Friday screams of a deeper reversal. Technically, the rally stopped just short of the 100 and 200-month simple moving averages near 1.2550. These are significant resistance levels that would be the perfect points for reversal. Technically, we see reasons for a near term recovery in the U.S. dollar but fundamentally there are plenty of reasons supporting the euro’s rise. The latest Eurozone economic reports show ongoing strength in the Eurozone economy. The European Central Bank is optimistic with members like Benoit Coeure saying the central bank will discuss changes to the policy language in early 2018. There’s no doubt that the positive momentum in the economy has ECB officials thinking about normalizing monetary policy and they could make the move as early as next month. This would be irrespective of how next week’s economic reports fare. EUR/USD will be in focus with a number of market moving data scheduled for release including the ZEW survey, February PMIs and the German IFO report. So even if EUR/USD dips, we expect buyers between 1.2250 and 1.2375.

Will ECB Stop EURO from Hitting 1.25?

Will ECB Stop EURO from Hitting 1.25?

Chart Of The Day

Will ECB Stop EURO from Hitting 1.25?

Thursday’s European Central Bank monetary policy announcement is the most important event risk this week. The euro is trading strongly ahead of the rate decision despite the risk of ECB President Draghi jawboning the currency. Since their last meeting in December, EUR/USD is up close to 5% and while a number of ECB officials have come out speaking against the currency’s rise, investors are waiting on Draghi. The problem is that we’re not sure he’ll say enough to halt the currency’s gains. Its important to realize that the euro is rising under the backdrop of a weaker dollar, hope for early guidance change a and stronger Eurozone growth. In order for traders to stop buying euros and start selling, Draghi needs to unambiguously dovish. That means expressing currency concerns and downplaying the chance of a guidance change. He can accomplish that by saying rate hikes won’t come until after QE ends and that the market misinterpreted the ECB minutes. In this case, EUR/USD will fall with profit taking possibly driving the pair below 1.23. However if Draghi expresses concerns about the currency but focuses on the improvements in the economy and acknowledges the possibility of early guidance changes, buyers will sweep in quickly especially following knee jerk decline and we may find EUR/USD on its way towards 1.25 because the trend is on the side of the currency.

Technically, there are 2 key resistance levels about the current one, the 200-day SMA near 1.2430 and then 1.25.

EUR/USD – Euro to 1.1670

EUR/USD – Euro to 1.1670

Chart Of The Day

EUR/USD – Euro to 1.1670

The most important event risk on next week’s calendar will be the highly anticipated European Central Bank monetary policy announcement. EUR/USD has traded in a narrow range ahead of the announcement as investors wonder whether it will be a hawkish or dovish taper. Having mentioned the need to make changes to their QE program for months, Mario Draghi is widely expected to announce plans to reduce the amount of bonds they purchase next year. The only question is by how much and for how long. Most analysts expect the ECB to cut bond purchases by EUR20B to EUR40B a month until June of 2018. They could make a smaller reduction and shorten the time, but that’s unlikely or they could cut more and lengthen the period of purchases to September or December. Either way, investors care more about the amount of bonds bought per month than how long they will be doing it, so the main reaction will be to the numerical target. Last month, the ECB suggested that not all decisions will be made at this month’s meeting because the euro was a source of uncertainty but the currency is now trading at 1.18 instead of 1.20 so they should not be as worried. Although there have been widespread improvements in the Eurozone economy since the last meeting (see table below) we believe that the central bank will opt for a dovish taper – cutting bond purchases by only 20B and extend it to September or beyond because they can always adjust it later and right now there’s too much political uncertainty. If we are right, the euro will fall and if we’re wrong and the ECB marries a more aggressive reduction with hawkish comments from Draghi, EUR/USD will hit 1.20 easily.

On a technical basis, EUR/USD is weak, having rejected the 50-day SMA at 1.1850 and appears poised to test the October 6th low of 1.1670. This may happen if US yields continue to rise and the market keeps banking on a dovish taper.

Is EURO Still a Buy?

Is EURO Still a Buy?

Swing

Is EURO Still a Buy?

German Chancellor Angela Merkel is widely expected to coast to victory at this weekend’s election. She is running for her fourth term (12+ years) and her position is so secure that many have looked beyond the election to her next government. Germany won’t be hit by populism as the latest polls show her party, the Christian Democratic Union and its sister party the Christian Social Union have 36-37% support with many exit polls showing last minute voters favoring the incumbent. A victory for Merkel will mean a victory for the euro. Although EUR/USD backed off 1.20 on Friday, investors are anticipating a win. In the very unlikely scenario that she loses, EUR/USD will crash quickly and aggressively and could fall below 1.18. If she wins, it will be under the backdrop of a improving Eurozone economy and a hawkish central bank. Manufacturing and service sector activity accelerated in the month of September according to the PMIs. This has and should continue to limit the slide in EUR/USD and could extend the gains for EUR/JPY and EUR/CHF. Next week’s Eurozone economic reports should continue to support the euro as we are look for improvements in the German IFO, unemployment and inflation reports.

Technically, Friday’s reversal candle is more negative than positive for EUR/USD so we don’t recommend going long the currency unless it drops to 1.1850 which right above the September 14 spike low. As long as EUR/USD hold above 1.18 the uptrend is in tact but if it breaks 1.18, we could see the pair slip as low as 1.16 before finding support so traders need to be careful of overleveraging positions.

EURO is Headed for 1.18

Chart Of The Day

EURO is Headed for 1.18

The EUR/USD is headed for 1.18. The Federal Reserve did exactly what the market anticipated but unfortunately that was not enough. The U.S. dollar sold off aggressively in the hour after the monetary policy announcement sending EUR/USD to a 2 year high. The FOMC statement did not disappoint – the Fed left interest rates unchanged, acknowledged that inflation declined and is running below 2%. They also set the stage for reducing asset purchases in September by saying balance sheet normalization will be “relatively soon.” These tweaks were all anticipated but clearly investors wanted more. So between lofty expectations, a sharp reversal in Treasury yields and the break of key technical levels, the dollar got crushed post FOMC and more losses are likely. Aside from the market’s negative reaction to FOMC, there’s nothing on the Eurozone calendar to threaten the greenback’s rally. No Eurozone economic reports were released today and nothing significant is on the calendar for Thursday. This should allow the euro to extend its gains as the market’s reaction to this week’s Eurozone economic reports show underlying demand for the currency. Traders completely shrugged off weaker PMIs and found relief in stronger business confidence. The shallow declines in the euro tell us that investors are bullish as they believe the European Central Bank is close to tapering asset purchases.

Technically, now that EUR/USD is above 1.17, the 23.6% Fib retracement of the 2008 to 2016 sell-off, there’s no major resistance until the 200-week SMA at 1.18. As long as EUR/USD holds 1.16, the uptrend is intact.

Can Euro Break 1.1200?

Can Euro Break 1.1200?

Chart Of The Day

It’s been an extraordinarily quiet week for the EURUSD which has been trapped in 50 point range for with little movement in the past few days. The market appears to be in equilibrium as traders await the next batch of data next week that could provide some light on relative growth prospects of both US and EZ.

Meanwhile, tomorrow’s EZ Flash PMIs often serve as the earliest indications of conditions on the ground. Markets anticipate a slight decline perhaps tempered by a pullback in French data. However, if the data surprises to the upside it could provide a much-needed lift to euro bulls and shake the currency out of its stupor as it would suggest that growth in EZ region is actually accelerating which may force the ECB to curb QE faster.

Technically the pair remains in a 1.1000 -1.1300 corridor, but a break above 1.1200 would provide it with an upward bias and possible move all the way towards 1.1500.

Will EURO Gap be Filled?

Will EURO Gap be Filled?

Chart Of The Day

Will EURO Gap be Filled?

The euro exploded higher after centrist Emmanuel Macron “won” the first round of the French Presidential election. Of all the probable scenarios, this was the best outcome for the euro, which explains why EUR/USD gapped above 1.09 when the markets opened for trading on Sunday evening. Macron is pro euro, pro EU whereas Le Pen wants a referendum on EU membership shortly after her victory. Although investors are relieved about Macron’s victory, there has been very little follow through in the leading investors to wonder if the gap near 1.0730 will be filled. While it can be argued that we won’t know who the final winner will be for 2 more weeks, Macron has a very good chance of winning so there’s less need for investors to hedge against a Le Pen victory. The latest German IFO report also supports a stronger currency with the business confidence index rising to 112.9 from 112.4. However there are 2 big risks for the euro this week – the first is Thursday’s European Central Bank monetary policy announcement and the second is a tax reform announcement by U.S. President Trump on Wednesday. The central bank wants the market to understand that policy is accommodative and will remain so for the foreseeable future and if that is emphasized on Thursday, the euro could fill its gap quickly. President Trump is also set to make a big announcement on tax reform Wednesday and if he effectively convinces the market of his plans, the dollar could soar, sending EUR/USD lower.

Screen Shot 2017-04-24 at 3.46.51 PM
Technically, this 4 hour chart shows EUR/USD support at 1.0820. If it falls below 1.0820, its headed for 1.0730. However the longer it holds above 1.0820 and even 1.0840, the more bullish it is for the currency and the greater the chance of a move back above 1.09.

EURO – Where to Sell?

EURO – Where to Sell?

Chart Of The Day

EURO – Where to Sell?

While EUR/USD rebounded just a few pips shy of 1.05 the last week of December the New Year starts with investors still wondering if the currency pair will hit parity. In a broader context, we are actually pretty close to that level and a move down to that rate hinges less on European developments than U.S. ones. If the U.S. dollar continues to strengthen, the euro will continue to weaken. The Eurozone has its own troubles but as weak as the euro may be, the slide in the currency is changing the outlook for inflation and growth. In the recent ECB economic bulletin, the central bank said they see inflation picking up strongly at the turn of the year, a view that the Bank of England shares. We’ll likely see this view repeated in the ECB’s account of their last monetary policy meeting, which is due for release next week. Data should also be relatively healthy with sentiment up and job growth growing, albeit at a slightly slower pace. The ECB’s easy monetary policy is paying dividends but Europe’s problems extend beyond day to day business activity. The greatest risk for the Eurozone and the euro next year are politics, terrorism, elections and a banking crisis in Italy. Many of these events are difficult to handicap but each of these scenarios could have a dramatic impact on the currency overshadowing positive improvements in the economy. Looking ahead we hope to sell rallies in the EUR/USD between 1.06 and 1.07 targeting a move to 1.01 or lower.

Technically now that the 1.05 level has been broken the next “main area” to sell EUR/USD will be at the 50-day SMA below 1.07. EUR/USD may not get that high so anywhere on the 1.06 handle may be a good place to scale in shorts. The focus however remains on 1.05. If the currency pair falls back below 1.0500, we should see the pair drop back to its December low which coincides with the 1997 low near 1.0350. If EUR/USD breaks above 1.07, then the next stop will be 1.09.