Major Currencies Forecasts - page 7
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Where Will EUR/USD Fall To?
Foreign currency exchange (FX) analysts examine whether you should go long or short on the Euro Dollar (EUR USD) exchange rate in the week ahead?
The European Central Bank’s monetary policy ended without any major announcements or policy action.
As expected, the ECB President Mario Draghi pushed expectations of important announcements for the December meeting, keeping the markets guessing about the central bank’s next step.
Market’s take relief because taper is still not on the table
Mr. Draghi mentioned that the ECB monetary policy committee did not discuss tapering. He also added that no one expects the QE to end abruptly.
"My perception is that the sudden stop is not in anybody’s mind. It’s not something that people naturally contemplate," said Draghi, reports The Wall Street Journal.
This statement allayed fears about tapering and raised hopes that the ECB is likely to continue its ultra loose monetary policy, until inflation reaches close to the ECB’s target.
EUR/USD: There's Something New Going On Here
What’s behind the moderately stronger USD and slightly weaker EUR?
An evolving narrative had its roots in higher Treasury yields but has moved on to a collection of other issues including: less skepticism on Fed rate hikes; European political uncertainties that will soon clash with new US fiscal probabilities; path dependent trades triggered by a break of old ranges; China’s ‘opportunistic’ weaker currency policy and reserve rebalancing considerations; and the EUR’s evolving status as the medium-term G3 funding currency of choice in the global hunt for yield.
It is too early to stand in the way of this recent momentum, even if the backdrop for a break to new cycle ranges on key currencies like the EUR will likely have to await a new year.
....The cumulative nature of the above factors works with EUR/USD challenging the year lows at 1.0711 soon, and plays to our 1.05 EUR/USD year-end forecast.
It also works with the closing gap between EUR/USD and USD/JPY vol. However, a break of the bigger cycle DXY highs and EUR/USD lows likely needs a new catalyst. Politics is one possibility, but political events are often more negative before the event, unless like Brexit, their widespread ramifications generate lasting uncertainty and an ongoing policy dilemma, that includes tolerating and/or encouraging currency weakness.
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EUR: ECB Speakers In Focus; Volatile Path For EUR/USD Ahead
ECB speakers this week, including President Draghi (Tuesday), should keep FX markets focused on the prospect of tapering. Other speakers include Executive Board Members Mersch and Praet on Thursday and Cœuré on Friday.
ECB President Draghi confirmed last week that tapering had not been discussed at the October meeting, but we think a reduction in the pace of purchases will eventually be necessary in response to either the shrinking pool of eligible assets or an improved economic outlook.
Both of these scenarios carry upside risks for the EUR, most clearly in the latter case, where EUR appreciation following the announcement is avoidable only if it is interpreted as a policy mistake. In the former case, we think EUR appreciation can only be prevented through an emphasis on the continued need for extreme monetary accommodation that the ECB will now seek to achieve through other means.
While this dynamic may introduce volatility to the EURUSD path over the coming year, we retain our view of depreciation, as the US continues to offer superior returns, supported by 50bp of Fed rate hikes by Q3 17, and better diversification characteristics.
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EUR/USD: Targeting The Lower-End Of M/T Range
EURUSD paused to catch its breath holding near the recent lows. This leaves the trend still directly lower to test price support next at 1.0826/22 ahead of the January low at 1.0711.
We would expect to see a bounce here, but beneath it can expose the lower end of the medium-term range at 1.0610/05. We would look for a fresh floor to be found here.
Resistance moves to 1.0912/16 initially, then 1.0952/63, with 1.1002/39 ideally capping to keep the trend directly lower.
Bigger picture, we continue to look for an eventual move to parity, and likely lower.
Whilst we remain bearish EURUSD, it is worth noting though rises in EUR real rates can often be associated with a stronger EURUSD. If we do see 10yr EUR real rates establish a bearish reversal above 1.19%, there is a risk this may well dampen EURUSD weakness,arguing that support at 1.0610/05 should continue to hold for the time being.
CS maintains a short EUR/USD targeting a move to 1.0615.
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Follow USD/CHF Higher, Caution On GBP/USD, EUR/USD
USD/CHF is the top technical currency pair in G10. The pair is breaking new ground (100th percentile) to the topside as the cross built momentum to reach the highest levels since June, prior to SNB comments yesterday. The cross is not at all stretched from a RR perspective and has an extremely smooth price action as measured by realized vol metrics.
In contrast, our indicator suggests lightening risk in sterling. The pair has reached its extreme level of stretchiness as measured by both RSI and RR metrics and has highly volatile price action as it bounces around on political headlines.
EUR/GBP is highly trending to the topside with VHF at 99th percentile. However, the pair looks relatively stretched from the RR perspective and is volatile as per realized vol.
Meanwhile, EUR/USD is moderately trending and breaking new ground (100th percentile) to the downside, although looks slightly stretched from an RSI perspective.
The move higher in USD/CAD has also seen it breaking new ground, although low levels of trend (VHF) suggest the move may be running out of steam.
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EUR/USD, GBP/USD: Position For 'European Policy Mire'
Recent data such as Germany's Ifo survey or composite PMI data have been far from shabby. And rate differentials vs. the US have largely been stable of late. Why then has EURUSD been trending lower again? We repeat our view that we believe the political environment in Europe is a major drag on the single currency.
The UK's Brexit vote – and the subsequent GBP collapse – helped highlight the structural political and economic vulnerabilities that can hurt European currencies even when underlying economic data are still decent. In this context, the apparent failure of the EU and Canada to agree a free-trade deal due to the objections of Belgium's Wallonia region further underlines not only the profusion of political forces capable of hurting sentiment but also the timing randomness of their appearances.
Going into 2017 with multiple European elections scheduled, there seem to be numerous possibilities for political strife within countries (e.g., traditional vs radical parties in general elections) and between them too (e.g., the UK vs. EU-27 over Article 50). With ECB chief Draghi pointing out again this week that the best way to raise longer-term interest rates is to boost trend growth rates and productivity, it is hard to imagine how a trade policy mishaps and general political noise will help to create a constructive environment.
Still, at least on the monetary policy front, some near-term respite came through this week for EUR and GBP. Both currencies benefitted from comments by their respective central bank governors suggesting that monetary policymakers are not entirely unmoved by the loss of purchasing power and potential inflationary pressures weaker ultra-low rates, QE and ever-weaker currencies can bring about. After months (years?) of relative neglect of this dimension while central banks fought economic weakness and disinflationary pressure, even this modest acknowledgement may provide some near-term benefits. We would nonetheless see any consolidation in EUR or GBP vs. USD temporary and any material rally as a selling opportunity.
As technical-based trades, CS is short EUR/USD and run a limit order to sell GBP/USD**
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EUR/USD Into Next Week's FOMC: Bearish Targeting 1.0775
EUR/USD – BEARISH BIAS – (1.0775-1.1100).
Renewed upward momentum for the US dollar will be tested in the week ahead.
The FOMC will meet in the week ahead and the updated statement could include a clear reference that it will decide on the appropriateness of a rate hike in December.
The latest public opinion polls will be in focus ahead of the looming Presidential election. The polls would have to shift materially in favour of Donald Trump to undermine the US dollar. The euro has derived little support so far from evidence of stronger economic growth momentum in the euro-zone.
In contrast, ECB taper concerns are having more impact on the eurozone bond market. If the sell-off in the euro-zone bond market accelerates it could temporarily lift the euro similar to in Q2 of last year.
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EUR/USD Weekly Forecast October 31-November 4
EUR/USD formed a base in the past week and posted an advance to erase losses from the prior week to snap a three-week losing streak. The week had less to do with risk events on the economic calendar as market participants focused on the week ahead. The upcoming week will be volatile. The economic calendar shows a number of high-impact data releases, including the last Federal Reserve rate decision and statement ahead of the much anticipated December meeting where markets at this point show little doubt that a rate hike will materialize.
Among the central banks, the Fed has faced many hurdles in tightening policy even the slightest amount. Talks of entering a rate hike cycle initially surfaced in early 2014, while there had been promises at the start of the year of four rate increases in 2016, none have materialized. There has been a common theme of the central bank giving some indication of moving ahead only to reverse course as circumstances turned unfavorable. Market participants will view this as a reluctance from the Fed to raise rates, casting some doubt in the week ahead whether positive developments will emerge from the FOMC statement.
A parallel has developed over the past few months that can be compared to the rate hike in December 2015. The Fed initially hinted at a pending rate hike in October and provided a heads up in November to eventually move ahead in December. Similar shifts have been seen in Fed communication this year since August.
In the upcoming week, the FOMC statement stands to provide a green light for a December rate increase. If it were any other central bank, the markets would openly accept the path the bank has communicated. While the Fed has skewed the risk to hold assets favoring a rate increase with their drawn out path of normalization, the risk to bet against the central bank is certainly not more appealing.
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USD: How Much Is A Fed Repricing Worth? How To Position?
With the Fed set to hike again at the December meeting, we look at the impact a repricing of the rates curve would have on the broad USD.
Our estimates suggest that if the market prices in a pace of normalisation consistent with our economists’ view (100bp by end-2018), the USD index would appreciate by about 5%
...and if the market prices in a pace similar to the FOMC’s economic projection (150bp by end- 2018), the USD index would be higher by about 8%.
However, the actual amount of appreciation that can be expected under these scenarios is likely to be more contained than our estimates suggest because of the feedback loop between USD and Fed policy, where USD appreciation reduces the need for a higher policy rate. As such, because of the impact such an appreciation would have on the Fed’s outlook, we believe that a pace of normalisation similar to the FOMC’s expectations is very unlikely. Moreover, with these appreciations, the broad USD index would reach levels not seen since the early 2000s.
Based on the sensitivity of the underlying crosses to changes in US rates, we favour being short JPY, NOK, SEK, and EUR against USD, as our estimates suggest that they would be the crosses most affected by the repricing of the pace of policy normalisation.
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Euro To US Dollar: German Retail Sales Miss Forecasts, EUR/USD Exchange Rate Slips Lower
Euro (EUR) Exchange Rates Unsettled by Concerning German Ecostats
After a bad start to the day, the Euro seems set to close trading against the US Dollar on a low note.
For the Euro, trading started on a poor footing and only worsened, due to crumbling German retail sales limiting confidence in the common currency.
While the US has seen rising personal spending, a falling Chicago PMI and an improvement for the Dallas Fed manufacturing index, the positive results have apparently won out.
This has led the US Dollar to rise to 0.91 against the Euro, equivalent to 0.4%.
The US Dollar experienced a further boost on the back of a better-than-expected September personal spending figure, which offered a more positive view of the world’s largest economy.
Support for the EUR USD exchange rate failed to materialise, meanwhile, as markets offered little reaction to the confirmation that inflationary pressure had edged higher within the Eurozone.
The Euro US Dollar (EUR USD) exchange rate began the week trending poorly, falling to 1.09 as the Euro registered minor losses across the board.
The source of this widespread investor discontent was Germany's annual September retail sales drop from 3.8% to 0.4% and a monthly worsening from -0.3% to -1.4%.
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