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EUR/USD: rate may return to 1.0620 before Trump's address

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The euro closed slightly up after trading on Monday. The single currency appreciated against the dollar to 1.0631 following a rise on the EUR/GBP cross and increased 10-year German bond yields.

The pair then reversed downwards due to a sharp rise in 10-year US bond yields and a subsequent fall in their German equivalent. The debt market reacted to comments by the Dallas Fed's president Kaplan, who suggested it would be better to raise interest rates sooner rather than later. Trading in Asia today has seen the EUR/USD rate fall from 1.0631 to 1.0565 (-66 pips).

Market expectations:

According to CME Group FedWatch Tool, the probabilities of a rate hike have increased from 26.6% to 33.2%, from 51.7% to 54.7% and from 69.6% to 71.4% for March, May and June respectively. Traders believe that the Fed will hold off on increasing rates in March, so all their focus is on Donald Trump's address to Congress. He will discuss various topics in his address, including tax reform.

Today, there are no significant data releases that could have a profound effect on market prices. Trump will take centre stage at 00:00 EET and in my forecast, I'm envisaging a price restoration to 1.0630 at around this time. Considering that Trump has been complaining about a strong dollar, its current level is well-positioned as we await his address. If the hour closes lower than 1.0565, the case for growth is gone.

Day's news (GMT 3):

  • 11:00 Switzerland: KOF leading indicator (Feb);
  • 16:30 Canada: Raw Material Price Index (Jan), Industrial Product Price (Jan);
  • 16:30 USA: preliminary GDP change data (Q4), goods trade balance (Jan), personal consumption expenditure prices (Q4), wholesale inventories (Jan);
  • 17:00 USA: S&P/Case-Shiller home price indices (Dec);
  • 17:45 USA: Chicago Purchasing Managers' Index (Feb);
  • 18:00 USA: consumer confidence (Feb), Richmond Fed manufacturing index (Jan);
  • 00:00 USA: Donald Trump to address Congress.

EURUSD rate on the hourly. Source: TradingView

Intraday forecast: low: 1.0565, high: 1.0628, close: 1.0620.

My expectations of a rebound didn't come off yesterday. A strengthening of the cross after rumours of a second independence referendum for Scotland, as well as a growth in 10-year German bond yields, helped the euro to restore to 1.0631. The bulls' momentum was halted at the 67th degree. A sharp rise in US 10-year bond yields left the euro-bulls behind.

From the 67th degree, the EUR/GBP pair fell to 1.0565. The current price is 1.0588. Buyers bought euros near the support, which is drawn through low points at 1.0537 and 1.0551. The line running through these minima is parallel to that that runs through the tops of 1.0618 and 1.0610. These lines have formed an upwards channel for intraday trading.

Having witnessed yesterday's slide from 1.0631, I wanted to forecast a slide to 1.0528, but looking at various historical patterns, I've changed my mind and gone for a strengthening of the euro. This prognosis is based on cyclical analysis and historical patterns on weekly timeframes. If the hour closes lower than 1.0565, the case for growth is gone.

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 has grown from 26.6% to 33.2%. This probability is low, and so remains a positive factor for the euro;

( ) 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 daily timeframe, the EUR/GBP cross has started a phase of growth;

( ) Cycles are indicating growth for the euro from 14:00 EET;

( ) On the daily timeframe, between the Stochastic indicator and CCI, some bullish divergences have formed;

( ) According to data for 21/02/17, small time speculators on the Chicago Exchange have increased their long positions by 1,687 contracts and reduced short positions by 2,888 contracts;

( ) The daily Stochastic indicators (5,3,3) are moving up;

( ) The monthly Stochastic indicator (5,3,3) has reversed upwards;

( ) The average line of price movements with a 120 bar window (1 week) from 10/2005, 08/2000, 10/2012 and 11/2008 suggest that the euro will rise against the dollar by the end of the day

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 May has grown from 51.7% to 54.7%, and in June from 69.6% to 71.4% (relevant for March);

(-) Dallas Fed president says it's better to raise rates sooner rather than later;

(-) Political risks in Europe are growing (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):

(-) According to data for 21/02/17, short and long positions from large speculators have increased on the Chicago exchange. Long positions have grown by 4,953 contracts to 132,216, while short positions have gone up by 12,556 contracts to 183,011. Net short positions have grown from 39,144 contracts to 50,779;

(-) German 10-year bond yields: 0.199% (down 1.00% for 27/02/17). they spent most of Monday in the green, acting as a support for the euro;

 (-) US 10-year bond yields: 2.369% (morning growth of 0.06%). On Monday, yields grew by 1.76% to 2.365%;

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

 (-) Long/short ratio as of 7:06 EET: 41%/58%, lots: 13050/18323, positions: 36644/44941. Thus ratio has effectively stayed neutral because traders on both sides have increased their positions.

 



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