Eur/usd - page 511
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EUR/USD Weekly Forecast November 28-December 2
EUR/USD closed the week out with a marginal gain to snap a two-week losing streak. The bulk of the volatility in the past week occurred during Wednesday’s US durable goods orders release but a sharp decline on the back of the strong data was erased in the second half of the week. The pair trades near a very important support level, but minutes from the latest Fed meeting released this past week affirmed a rate hike in December and a potentially faster pace of tightening in 2017 and should keep Dollar declines limited.
The FOMC meeting minutes indicated that Fed members generally saw the case for a rate hike continue to strengthen and had a more optimistic tone towards inflation. The main obstacle to the path of normalization has been a subdued rise in inflation that dates back to late 2014 when it was initially communicated that declining energy prices were having a transitory effect. With nearly two years passing since the observation some concerns arose at the September meeting as to why improvements in the labor markets were failing to have a notable impact on inflation. Committee members acknowledged recent gains in the PCE index in the November minutes and went as far as to express that a rapid rise in inflation would force the Fed to tighten at a faster pace than expected if the 2% objective was met ahead of when it was previously expected. Members also commented that recent Fed communication was consistent with a near-term rate hike and that an increase should occur at the December meeting for this reason and to preserve credibility.
The markets have essentially already fully priced in a rate increase next month with the futures market indicating a 93.5% probability by the end of the week. Wednesdays minutes release caused little volatility to the Dollar pairs and rate hike odds. With the markets considering a December rate hike essentially a done deal, the focus will start to shift to the path of normalization in 2017 and inflation data out of the United States will be a focal point in pricing in probabilities.
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On the last Friday’s session the EURUSD rose with a wide range and closed near the high of the day, also managed to close above Thursday’s high, which suggests a strong bullish momentum.
The pair still closed below the 10, 50 and the 200-day moving averages that should act as dynamic resistances.
The key levels to watch are: a daily resistance at 1.0819 (resistance), a Fibonacci extension at 1.0666 (resistance), a daily resistance at 1.0622, the 10-day moving average at 1.0618 (resistance) and the all-time low at 1.0462.EUR: The 'Rates Selloff'; Selective Downside Into 2017
Themes: The rates sell-off. Market expectations of a large fiscal stimulus in the US following Trump's victory have triggered a re-pricing of the Fed, with the market now expecting a Dec hike with a 96 percent probability. The sell-off in rates is helping Draghi, making QE extension—by another six months in our view—much easier, as more bonds move above the depo rate and become eligible. We have been arguing that the ECB challenges will come when QE extension requires relaxing the capital key, which could be the case in the second half of 2017.
Markets are also getting concerned about political risks in Europe, having learned a painful lesson from the Brexit referendum and the surprising result in the US elections. Renzi is likely to lose the referendum on constitutional reform according to the polls and even if Italy avoids a snap election, we believe his political capital will weaken and the anti-Euro Five Star party could be a strong contender in the 2018 election. The probability of Le Pen wining the 2nd round in France may be small according to the latest polls, but markets cannot ignore such a high impact risk anymore.
Forecasts: more (selective) EUR downside We have been bearish EUR and EUR/USD is now below our end-year projection. We recently dropped our EUR/USD forecast to 1.02 by mid-2017.
We expect ECB QE tapering to support the Euro eventually and we see EUR/USD back at 1.10 in 2018.
Political risks in the Eurozone could weaken EUR/GBP in h1 2017. However, QE tapering next year could support EUR/JPY.
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The single currency marked slight increase against the US dollar on Monday. The EUR/USD pair reached a daily high at 1.0685 and low at 1.0563. The pair remains at risk of further decline and the next target appears to be the levels at 1.0550.
Yesterday the EURUSD tried to rally but found enough resistance at 1.0666 Fibonacci extension to reverse although closed slightly in the green, in the middle of the daily range, creating a doji pattern. In addition the pair closed within Friday’s range, which suggests being clearly neutral, neither side is showing control.
The currency pair closed above the 10-day moving average that should act as a dynamic support but is still trading below the 50 and the 200-day moving averages that are acting as dynamic resistances.
The key levels to watch are: a daily resistance at 1.0819 (resistance), a Fibonacci extension at 1.0666 (resistance), a daily resistance at 1.0622, the 10-day moving average at 1.0597 (support) and the all-time low at 1.0462.
EUR/USD Establishes Consolidation Phase
EUR/USD failed a rally attempt in yesterday’s trading, as the pair advanced to 1.06855 for a high, the highest level since November 17th, but failed to sustain the gain and eventually dropped into negative territory for the day. In today’s trading, the pair is marginally lower relative to the North American close, holding near the 1.0605 level.
The pair is off the lows of the session following the release of November Eurozone Consumer Confidence, which was unchanged from the flash reading at -6.1 and an improvement from the -8.0 reading in October.
Later today, German CPI for November will be released. The annual inflation rate further picked up in October, hitting a two-year high of 0.8%. Economists expect a further move higher to 0.9% in November. Also in today’s trading the second estimate of US Q3 GDP will be released. Economists expect the figure to be revised up to 3.0% from the first reading of 2.9%. Also in the US today, November consumer confidence is on the calendar. This month, expectations are for a reading of 100, up from 98.6 in October.
Yesterday’s failed rally attempt in EUR/USD in the presence of a persistent, extreme oversold condition is a sign of underlying weakness that suggests the risk of a return to the low established in last week’s trading. That low stands at the 1.05183 level and represents a test of key support at the December 2015 corrective bottom at 1.05237 as well as the major corrective bottom established in March 2015 at the 1.04590 level.
A drop below the key zone of support would confirm a breakdown from a multi-month trading range, as can be seen on the monthly chart, calling for further losses in EUR/USD on a longer term basis.
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