Euro undervalued
|Yesterday's testimony from Fed Chair Powell has left the market in no doubt that the rate hikes are going to be more aggressive with a higher terminal rate and likely to stay there for longer. The USD surged higher on the testimony with the dollar index surging 1.4% in the daily session. The DXY is made up of 6 major currencies pitched against the USD. The Euro is the biggest component accounting for approximately 2/3 of the weighting. Interesting to note that despite the significant USD strength, the Euro put in an equally powerful fight. The momentum meter chart below shows the EURO as the 2nd strongest currency on the day. Had the EURO unperformed more so, as is often the case with greenback strength, (EURUSD being the most actively traded pair), the DXY would have been significantly higher.
The aggressive Fed is now looking very much priced into the dollar which is struggling to break this current daily resistance level. (see chart). Of course, it is unknown if the level will hold or not, but if indeed it does and the dollar succumbs to profit taking you can expect the EURO to be the main beneficiary. So our plan of attack is to take clues from the dollar and look to potentially buy the Euro, against weaker currencies. Referring back to the momentum meter you can see the AUD and the JPY are the weakest in the basket. The AUD is under pressure for the China realignment of growth expectations. The JPY is struggling to break higher as the low-interest rate policy seen under the outgoing BOJ Governor Kuroda, is likely to be maintained by his replacement next month. Moreover, this week's BOJ policy meeting will be Kurudo's last. He is, therefore, in our opinion unlikely to act too drastically with any policy changes, putting further downward pressure on the JPY.
So eyes on buying EURAUD and EURJPY if the USD holds resistance. Pick your entries wisely using pre-determined strategy rules and always manage risk.
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