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EUR/USD: François Bayrou has reduced political risks in Europe

Previous:

Trading on the euro on Wednesday closed up. In the first half of the day, the euro fell against the dollar to 1.0494 on the back of a rise in premiums over political risks. A ricochet from the session minimum followed at 18:38 (GMT 3) after François Bayrou, leader of the "Democratic Movement" party, confirmed that he would not stand in France's presidential election, opting instead to throw his weight behind independent candidate Emmanuel Macron.

In the space of three minutes, the euro surged 46 points to 1.0544. Experts believe that Bayrou's decision not to stand in the election has reduced the chances of a Le Pen victory.

The second wave of buying came after the publication of the FOMC's minutes. The minutes of the meetings held on the 31st of January and the 1st of February show no new developments. Fed members had already stated their opinions on interest rates after the meetings, including Janet Yellen's address to Congress. The euro rate rose to 1.0574.

By the end of the day, 10-year German bond yields grew by 4.09% to 0.28%. US 10-year bond yields have fallen and currently stand at 2.413% (-0.21%). Both of these occurrences has a positive effect on the euro.

Market expectations:

There are no important statistics due to be released on Thursday, but there will be some speeches, which could potentially have an effect on trade if somebody says something unexpected.

The EUR/USD pair has corrected to 1.0574. On the daily timeframe, a reversal candle has formed. I'm forecasting a further strengthening of the euro to 1.0598.

Day's news (GMT 3):

  • 10:00 Germany: GDP (Q4), Gfk consumer confidence survey (Mar)
  • 11:55 Eurozone: ECB board member Peter Praet's speech;
  • 13:00 Eurozone: Bundesbank president Jens Weidmann's speech;
  • 14:00 UK: CBI distributive trades survey (Feb);
  • 16:30 Canada: change in corporation profits (Q4), USA: jobless claims (13-19 Feb);
  • 16:35 USA: Fed member Dennis Lockhart's speech;
  • 17:00 USA: Housing Price Index (Dec);
  • 18:30 USA: EIA natural gas storage change (13-19 Feb);
  • 19:00 USA: EIA crude oil stocks change (13-19 Feb);
  • 21:00 USA: Fed member Robert Kaplan's speech.

EURUSD rate on the hourly. Source: TradingView.

Intraday forecast: low: 1.0540, high: 1.0598 (90 degrees), close: 1.0591.

Trading on the euro closed up on Wednesday. The actual minimum turned out 27 points lower than my projected figure. Bayrou fixed this situation with his decision not to run for president.

The EUR/USD pair corrected upwards from 1.0494 by 67 degrees. From here, one would normally envisage a slide for the pair, but I'm going for a rise. Why? There are a lot of technical factors (see below), including cycles, that point to further growth for the euro.

On the daily timeframe a reversal candle has formed. This was a key factor in making my forecast with a target of 1.0598. Before growing, the rate should revert to around 1.0540. If German 10-year bonds rise and their US counterparts fall, we can consider a target of around 1.0622 (112 degrees).

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;

( ) François Bayrou, leader of the "Democratic Movement" party, has ruled out running for the presidency and thrown his weight behind independent candidate Emmanuel Macron;

Technical (short-term):

( ) On the hourly timeframe, the EUR/GBP cross has broken through the trend line. The breaking through of the support level at 0.8350 turned out to be false;

( ) German 10-year bond yields: 0.28% (up 4.09% from 22/02/17);

( ) US 10-year bond yields: 2.413% (down 0.21% since morning);

( ) Price movement patterns from 01/2016, 08/2000 and 04/2001 indicate that the euro will strengthen before markets close for the day;

( )A reversal bar with a long shadow has formed on the daily timeframe;

( ) On the daily timeframe, between the rate and the CCI, a bullish divergence is forming;

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;

(-) Long/short ratio: 22%/77%, lots: 7106/23823, positions: 22951/53267.



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