EURUSD: Will the downtrend resume?

Despite the Eurodollar commencing the European session by moving as high as 1.2839, the pair once again found resistance around 1.2840. Since then, the pair has unexpectedly pulled back by 80 pips and is currently trading at 1.2749 at the time of writing. The sudden decline in the pair occurred after speculation emerged that the European Central Bank (ECB) was considering extending its current asset purchasing program to begin acquiring corporate bonds at some point in 2015.

This rumour encouraged investors to re-continue pricing in future stimulus from the ECB, but caution is required for those who are now expecting the Eurodollar 2014 bear run to continue. Indications that the ECB appear prepared to continue loosening its already loose monetary policy stance to reinvigorate the EU economy would clearly have bearish implications on the Euro. Additionally, although it’s likely that Thursday’s EU PMIs will continue to reflect the fact that a weaker euro is still not improving data, and this will also feed into fears that the EU is entering a period of stagnant growth.

Where the Eurodollar fluctuates this week is really dependent on how the markets react to the upcoming US economic releases. In order for the EURUSD bear run to resume, investor attraction to the Dollar needs to remain consistent and, as the market encountered last week, a sudden sell-off in the USD will result in pairs such as the Eurodollar moving to the upside. Ahead of the inflation release tomorrow, we have already seen from the recent FOMC Minutes release that there is apprehension among the Fed that the higher valued Dollar could have a detrimental impact on US inflation expectations.

The Federal Reserve’s usually hawkish member, James Bullard, really surprised the majority when he unexpectedly suggested last week that the Fed should consider delaying QE and continue purchasing asset-based securities to prevent a decline in expected inflation levels. Even before those comments, we were already noticing from a surprising decline in CPI from China and the United Kingdom last week that reflects lower than expected inflation levels are emerging as a global theme. If this trend continues and a higher valued USD is also lowering prices, there is a threat that Wednesday’s annualised US inflation data will not meet the 2.1% expectation.

If this is the case, speculation will mount that the Federal Reserve will continue QE next week. As such, it will only be a matter of time before investors begin to realize that a US rate rise remains far into the distance and before we know it, the Eurodollar will be approaching 1.28 once again.