EUR/USD Eyes 1.1808 by Q1 2016, EUR/GBP eyes 0.78

The EUR/USD pair witnessed a technical breakout on Monday on the daily charts, signalling the recovery from the March 2015 low of 1.0469 may have resumed.

The main reason for the upside break is the sharp fall in the Fed rate hike bets. Markets do not see a rate hike happening in 2015, but even the probability of a rate hike in March 2016 is very low. Right of the bat, it is worth noting that the rates could be hiked by 5/10/15 basis points, but such rate hikes would even lack the symbolic appeal and are more likely to signal extreme nervousness on the part of the Fed to begin policy tightening.

Meanwhile, the European Central Bank is likely to keep its QE program unchanged at least till the end of the current year. The popular opinion suggests that EUR is now almost 1000 pips higher from its March low and thus, may force the ECB to do more QE or push rates further into the negative territory. However, it must be remembered that the EUR is still more than 2000 pips below its May 2014 high of 1.3991. Despite this, inflation in the Eurozone is hovering around zero levels in annualised the terms. It is thus, quite clear that devaluing the currency is unlikely to help matters. Furthermore, a possible recovery in crude would only add to the EUR’s strength. (Sell-off in crude had triggered USD strength in Q4 2014 as it meant more easing from advanced nation central banks).

Carry unwind is also likely to continue heading into the year end on account of China-led risk aversion. Europe’s vulnerability to the Chinese economy is quite clear from the action in the European equity markets today. German export machinery is at risk since the China slowdown is likely to become more intense ahead. The drop in the Chinese imports (low domestic demand) is a more serious problem for Europe and the world economy and provides little scope for Fed to hike rates this year or in Q1 2016. Moreover, China slowdown (in imports) drags fed away from the rate hike (a negative sign) as it cannot afford to have a strong USD at a time when the global economy is facing aggregate demand deficiency and its own domestic consumption is anaemic.

And last but not the least, a spike in the EUR/GBP cross should also add to the upside momentum in the GBP/USD pair. BOE too is expected to turn dovish and may actually cut rates ahead (https://www.fxstreet.com/analysis/macro-scan/2015/09/29 ). BOE’s McCafferty, the only member vouching for a rate hike, was on the wires today stating that the bank may consider interest rate (cut) rather than QE and may even consider QE if required.

EUR/USD Technical Chart

• The pair appears on its way to test 1.1808 (38.2% of May 2014-March 2015 plunge)

• If we put a Fib expansion from 2008 high-2008 low-2009 high, the 100% expansion level stands at 1.14357; a level which has acted as a strong resistance since May 2015. The pair did rise above the same on a couple of occasions,but failed to see even a weekly close above it.

• However, with dropping Fed rate hike bets and other reasons discussed above, the odds of a weekly/monthly close above 1.14357 are high now and this is likely to be followed by a rise to 1.1808 levels.

• On the daily and the weekly chart, we have already witnessed an upside break from the symmetrical triangle formation.

EUR/GBP – Inverted Head and Shoulder breakout almost confirmed

The EUR/GBP inverse head and shoulder breakout was already anticipated here (https://www.fxstreet.com/analysis/macro-scan/2015/10/06 ).