EUR/USD, it's all about the dollar

Throughout the past week, the shared currency extended its current strength sparked in early September, climbing as high as the vicinity of 1.3650. The political scenario, both in Euroland and mainly in the US, was exclusively the main driver of the recent price action, and it is posed to keep playing a key role in the upcoming week as well. In the data front, the softer tone from the Chinese manufacturing PMI has associated with equally downbeat readings from the euro zone prints and poor German retail sales, amidst a continuation of the downtrend in EMU’s consumer prices for the month of September. In the second half of the week, the unexpected dovish tone from ECB’s Mario Draghi and the administrative paralysis in the US Government have taken centre stage, offsetting positive PMI prints from EMU’s Service sector and retail sales.

US shutdown, debt ceiling, Italy and Portugal

Applying to extreme simplicity, the game of chicken between Democrats and Republicans regarding Obamacare has morphed into another shutdown of the US Government on October 1st, unleashing a sharp sell off of the world’s reserve and of course, benefiting the broad risk-associated assets as a direct consequence. However, risk aversion is expected to increase its presence in the markets alongside the negotiations of the debt ceiling, with the implicit date of the US to run out of funds being October 17th. A default would follow should congressmen fail to reach a deal and raise the ceiling, although the occurrence of such scenario is perceived by investors as quite far… for now.

The Italian political arena, most of the time emulating a dormant volcano, was in the headlines again during the past week, although this time it brought in a much needed relief for both domestic and foreign markets after PM Enrico Letta won his confidence vote with the eternal Silvio Berlusconi supporting the government at the very last minute, something unthinkable just days ago. A group of ‘parliamentary rebels’ from the PdL party abandoned their loyalty to ‘Il Cavaliere’, facilitating the final outcome, although this should be considered as a temporary setback for the former PM. More will come, rest assured of it.

Positive winds of change seems to be now blowing in Portugal, where the so-called Troika approved the recent improvement of the economic fundamentals, unlocking the next bailout funds and allaying rumours of a second bailout, source of the recent spike in domestic bond yields. However, more austerity measures – read budget cuts – are a done deal in order to achieve the promised 4% budget deficit to GDP ratio.

Repetitive ECB and… the EUR safe haven status?

Last week’s ECB gathering resulted in an utter fiasco, after just slight changes in the statement wording and a repetitive tone from President Mario Draghi. The move once again caught markets off guard, as consensus was broadly tilted to the dovish camp, lifting the EUR/USD beyond 1.3600 the figure on Wednesday and to fresh 8-month high at 1.3647 on Thursday. Briefly, Draghi seemed to have ignored the current high levels of the spot and the negative trends in both the excess liquidity and consumer prices in the 17-nation region. Being ‘price stability’ the ECB’s mandate, it is quite surprising the inaction of the central bank in this regard. Recall that the forecasted CPI for 2014 is 1.4% vs. the 2.0% target, although it would surely be revised lower any time soon. Another LTRO and a rate cut yet remain in the ECB’s toolbox, just in case the incipient recovery runs out of vigour or the political spectre takes over. I dare to argue against those who attach some sort of ‘safe haven’ status to the single currency, especially during these times of US political turmoil, which saw the USD logically weaker. I think that the re-emergence of risk aversion and even a positive solution for the current congressional gridlock in the US would morph into further strength of the greenback, as market participants would gauge the Fed’s tapering to have resumed and to start before year-end or at the beginning of the next year. And this is the main event in the upcoming quarters, should the US politicians manage to leave behind the current shutdown and to raise the debt ceiling.

Bottom line

I do believe in an eleventh-hour deal in the US front, bringing forward once again the debate regarding the QE tapering timing, dragging the pair to the boundaries of the psychological 1.300 handle towards year-end. However, the upcoming sessions would keep the same tone and a test of 2013 highs above 1.3710 should not be ruled out. The FOMC minutes appear to be the main event although traders would follow the evolution of the shutdown in order to gauge the postponed release of September’s Payrolls. The most relevant publications in the euro docket will be the Sentix index on Monday, expected to show a continuation of the recent upbeat momentum followed by German Factory Orders, Industrial Production figures and Consumer Prices.

When comes to technicals, spot closed around 1.3560 last Friday, easing more than a big figure from multi-month highs in the boundaries of 1.3650. There is nothing in terms of resistance on the way up to ytd peaks beyond 1.3700 the figure. On the flip side, the initial support aligns in the area of 1.3460/40, where converge August highs, the 23.6% Fibonacci retracement of the July-October upside and the 21-day moving average. Further selling pressure will find the 1.3340/1.3270 region, where sits the 55-day moving average, the 38.2% retracement and the 3-month uptrend set from July lows.

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Sitting in the terrace, enjoying the rain in southern Spain. The sunset offers a unique view as the dark clouds mix with the tops of the surrounding hills. Yes, it is time for my favourite drink: a gin & tonic. Simple and complex at the same time. Unique. Spain offers one of the best gins in the world, the Gin Mare. Grab a tall glass half-filled with ice; add a few leaves of basil and a sprig of rosemary. Pour 50 ml of gin (this time I’m gonna go for a double). Slowly stir with a long spoon so that all the essences come into play. Top with ice. Pour tonic water, very slowly. Let the bubbles play. Stir once again and enjoy. Have a great trading week!