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EUR/USD: euro's situation unclear due to political risks in the Eurozone

Previous:

On Tuesday, trading on the euro closed down at 1.0530. The euro came under pressure from the release of a public opinion survey in France and the speech from the head of the Philadelphia Fed, Patrick Harker.

According to the latest survey by Elabe, support for presidential candidate Marine Le Pen has risen from 25.5% to 27%. In his evening address, Patrick Harker repeated that he couldn't rule out the possibility of a rate hike in March.

German 10-year bond yields have fallen by 1.31% to 0.301% per annum (meaning a falling euro).

Market expectations:

At the centre of attention for Wednesday is the minutes from the FOMC's last meeting. Harker has already given the market an idea of what to expect, so traders should be relatively calm on this.

In Asia, the euro is trading slightly in the green as US bond yields rise. The euro has strengthened after some correctional movements on the crosses. The euro's situation remains contradictory. Indicators are pointing to a weakening euro, while cyclical analysis points the other way. From this, one might suggest that the euro will fall to a new low in today's European session, followed by a restoration to around 1.0562/65 after the publication of the FOMC's minutes.

Day's news (GMT 3):

  • 12:00 Switzerland: ZEW survey - expectations (Feb); Germany: IFO business climate (Feb);
  • 12:30 UK: GDP (Q4), total business investment (Q4), Index of Services (Dec);
  • 13:00 Eurozone: Consumer Price Index (Jan);
  • 13:30 Eurozone: Targeted LTRO;
  • 14:00 UK: MPC member Cunliffe speech;
  • 16:30 Canada: retail sales (Dec), retail sales ex autos (Dec);
  • 18:00 USA: existing home sales (Jan);
  • 21:00 USA: FOMC member Powell speech;
  • 22:00 USA: FOMC minutes
  • 23:00 UK: MPC member Shafik speech.

EURUSD rate on the hourly. Source: TradingView

Intraday forecast: low: 1.0521/23 (to break through the 135th degree), high: 1.0563, close: n/a

On Tuesday, the EUR/USD rate fell from the 90th degree to the 135th. The rate will stay in the reversal zone within a range from 1.0525 to 1.0550. The euro experienced some strong pressure from the crosses and the fall in German 10-year bond yields.

As I've said above, the euro's situation is contradictory. The key factors of influence on the currency pair are listed below.

In my piece on the European session, I wrote that if buyers plan to go lower, the rate won't bounce any higher than 1.0560. The current correction will act as a precursor to a continued depreciation of the euro.

According to my forecast, I'm envisaging a dip to around 1.0521/1.0495 followed by a rebound up to 1.0562. If the 1.0520 level doesn't hold and closes lower than this after the hour, then there is a high risk of the rate falling to 1.0411 in the next 3 days. Moreover, In Asia, 10-year bond yields are rising in anticipation of the FOMC's minutes being released. If this rise continues, and if German 10-year bond yields fall, then the euro will not stay at 1.0545. The bounce will happen somewhere between 10:00 and 12:00 (GMT 3).

Positives for the euro ( ):

Fundamental:

( ) US president Donald Trump favours a weaker dollar;

( ) According to CME Group FedWatch Tool, the probability of a rate hike in March is 17.7%;

( ) The threshold for acceptable US government debt of 20.1 trillion USD may be reached by March this year. This will create headaches for new US president Donald Trump. A new law on the debt ceiling will come into force on the 16th of March 2017;

( ) Greece may need less money than the IMF had planned for;

Technical (short-term):

( ) On the daily timeframe, the EUR/GBP cross has stayed in the support zone between 0.8430 and 0.8450;

( ) On the daily timeframe, the euro index has stayed at the support level at 98.45;

( ) Price movement patterns from 08/2013, 09/2015, 02/2008, 07/2005 and 08/2002 indicate that today a new minimum will be reached, followed by a reversal upwards from 10:00 to 12:00 (GMT 3).

Negatives for the euro (-):

Fundamental:

(-) The ECB has no plans to curtail its QE program. According to the minutes of the latest meeting, most members of the Governing Council don't believe it necessary to reduce the amount of stimulus (long-term impact);

(-) The probability of a rate hike by the US Fed in June has risen from 45.8% to 46.5% (relevant for March);

(-) Political risks in Europe (French elections and Brexit);

(-) Greece is unable to reach a deal with its creditors for financial assistance;

(-) Recent statistic favour the US;

(-) Donald Trump is set to address Congress on the 28th of February;

(-) Head of the Philadelphia Fed, Patrick Harker, believes that a rate hike in March is possible;

Technical factors (short-term):

(-) Net short positions from speculators big and small have increased on the Chicago exchange. For large speculators, it has grown at the expense of long positions by 2079 contracts. For small speculators, the number of short positions has increased by 6632 contracts;

(-) The daily and weekly Stochastic indicators (5,3,3), AO and AC are moving downwards;

(-) US 10-year bond yields: 2.445% (morning growth of 0.66%);

(-) German 10-year bond yields: 0.301% (down 1.31% from 21/02/17);

(-) Long/short ratio: 16%/83%, lots: 6627/34231, positions: 21144/69447;

(-) Cycles point to a weakening euro in the first half of the day.

 



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