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EUR/USD: correction overdue

Previous:

The EUR/USD instrument closed up after trading on Monday, leaving a long tail on the daily candlestick. There is an increased probability of the EUR/USD going through a correctional phase given that the EUR/GBP cross now favours buyers, with the pair's three-day slide having come to an end.

It's still too early to be sure, so we await confirmation, which will be given should the price overcome the 1.0680 and 1.0700 levels. What caused the slide to 1.0642 and subsequent sharp rebound is a mystery to me. By the day's close, the Euro had restored from a minimum of 1.0642 to 1.0676.

Market expectations:

At the time of writing, the Euro is trading at 1.0670. Signals on the hourly timeframe are indicative of an imminent upwards correction. It seems the price has found its bottom in the 1.0640 - 1.0650 range. For Tuesday, I'm forecasting a restoration to around the 1.0700 mark.

Markets today will be directing their attention towards the publication of the FOMC's minutes for their meeting in March (due 5th April), as well as the US jobs report to be published on the 7th, which should shed some light on the state of the US economy and its readiness for another rate hike.

Day's news (GMT 3):

  • 11:30 UK: PMI construction (Mar);
  • 12:00 Eurozone: retail saled (Feb);
  • 12:15 Australia: RBA governor Lowe's speech;
  • 15:30 Canada: trade balance (Feb);
  • 15:30 USA: Trade balance (Feb);
  • 17:00 USA: factory orders (Feb), IBD/TIPP economic optimism (Apr);
  • 23:30 USA: Fed's Tarullo speech.

EURUSD rate on the hourly. Source: TradingView.

Intraday forecast: low: 1.0656 - 1.0663, high: 1.0700, close: 1.0687.

On Monday, the Euro closed up. Monday against Friday didn't work out. Buyers were subdued by some curious price swings at around 17:00 EET. Given that the Euro quickly returned to 1.0670 after falling to 1.0642, for Tuesday, I'm staying in the bull camp. The Euro's rise has been facilitated by the EUR/GBP cross and falling US bond yields.

There are a few signs indicating a transition into a correctional phase for the Euro. First is the bullish divergence between the price and the AO and CCI indicators. Secondly, the trend line has been broken through. Thirdly, a V-model has formed following the rate's quick restoration yesterday. A long tail has formed on the daily candlestick.

Cyclical analysis and patterns also indicate a strengthening Euro, but these have proved terrible methods of prognosis in the last couple of weeks. It feels as if these instruments are showing incorrect values due to external forces. After Brexit formally got underway, traders started converting Euros into pounds. The aim is unclear as of now. Clearly, they think that the pound has significantly depreciated, while the British government in promising to avoid a hard Brexit.

In order for the transition into a correctional phase to be confirmed, the EUR/USD pair must break the 1.0680 and 1.0700 levels. At the moment, the lb balance line is acting as a resistance.

The price is currently located at the 22nd degree. Trends show that the rate often bounces off of this level, so traders should be alert. Take my forecast with a pinch of salt, the likelihood of it working out is about 50/50. The case for the Euro's strengthening has been made above. To see what could have a negative impact on the single currency, keep reading.

Positives for the euro ( ):

Fundamental:

( ) Head of the ECB, Mario Draghi, has hinted that the central bank may not need to provide any further stimulus to revitalise Europe's economy. From April to December 2017, the ECB will reduce their monthly assets purchases from 80 to 60 billion EUR;

( ) ECB bosses have discussed the possibility of raising interest rates before the QE program comes to an end;

( ) On the 24th of March, Donald Trump withdrew his proposed healthcare bill to replace Obamacare from the US Congress' agenda;

Technical (short-term):

( ) According to data from 28/03/17, large speculators on the Chicago Exchange have increased their long and decreased their short positions. Long positions have grown by 1,807 to 160,453 contracts, while short positions have fallen by 9,283 to 167,608 contracts. Net short positions have fallen from 18,245 to 7,155 contracts;

( ) US 10-year bond yields: 2.328% (down 2.55% from 03/04/17);

( ) In Asia, US 10Y bond yields have fallen by 0.77% to 2.332%;

( ) EURGBP (W):  the CCI (20), AO and AC are up;

( )EURGBP (D): the CCI (20) is up;

( ) EURUSD (M): the Stochastic (5,3,3), AO, AC and CCI (20) are up;

( ) EURUSD (W): The Stochastic (5,3,3), AO, AC, and CCI (20) are up;

Negatives for the euro (-):

Fundamental:

(-) Eric Rosengren, president of the Boston Fed, argues that the central bank should raise interest rates every other session, meaning that he expects to see another 3 hikes this year;

(-) FOMC member Williams is envisaging another 2-3 rate hikes this year and isn't ruling out the possibility of even more. The Fed could also start reducing its balance sheet this year, which is earlier than many economists had predicted;

(-) Dallas Fed president Kaplan has said 3 rate hikes in 2017 is his base case;

(-) FOMC member Mester says that the Fed needs to reduce the size of its balance sheet this year;

(-) St. Louis Fed president Bullard has said that the Federal Reserve needs to act quickly on normalising its balance sheet;

(-) According to CME Group's FedWatch Tool, on Friday the 31st of March, the probability of a rate hike in May is still 6.4%. The probability in June has risen from 54.0% to 62.5% and in July from 60.8% to 68.2%;

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

Technical factors (short-term):

(-) Small speculators on the Chicago exchange have reduced their long positions by 1,095 to 64,185 contracts and increased shorts by 10 to 63,103 contracts. Net long positions have fallen from 2,187 to 1,082 contracts;

(-) Short/long ratio according to myfxbook as of 06:54 EET: 20%/79%, lots: 9144/35234 (previous day: 5898/19599), positions: 34123/55724 (previous day: 21138/32715);

(-) German 10-year bond yields: 0.278% (down 15.24% from 03/04/17);

(-) EURGBP (M): the AC, AO, CCI (20) and Stochastic (5,3,3) indicators are down;

(-) EURGBP (W): The Stochastic (5,3,3) and CCI (20) are down;

(-) EURGBP (D): the AC, AO and Stochastic (5,3,3) indicators are down;

(-) EURUSD (W): the Stochastic (5,3,3) is down;

(-) EURUSD (D): the AO, AC, CCI (20) and Stochastic (5,3,3) indicators are down;

Built into the price:

(-)  The Ex-Prime Minister of France, Alain Juppe, has ruled himself out of participating in the presidential election;

(-) Fed member Evans is expecting 2-3 rate hikes in 2017. The Federal Reserve will make a decision about the next hike in June;

(-) President of the Philadelphia Fed, Harker, announced that the Federal Reserve will continue to gradually increase interest rates throughout 2017;

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

( ) Marine Le Pen has had her EU parliamentary immunity from prosecution lifted for political reasons;

( ) US president Donald Trump favours a weaker dollar;

( ) 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;

( ) The Greek government has made some progress in its talks with international creditors on the second stage of their reform program;

( ) Ewald Nowotny, a member of the ECB's governing council, has said that the bank could raise the deposit rate before the main refinancing rate;

( ) ECB member Lautenschläger warns that it's time to prepare for a change in the bank's policy.



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