EUR/USD Forecast: new year, old jitters

  • Sentiment favors the greenback but with a  cautious tone.EUR/USD seen holding above 1.1200.
  •  Soft growth in Europe, a partial US government shutdown, Brexit uncertainty, and the trade war are the reasons behind the market's lack of definitions.

It was a tough start to 2019 but there's nothing new under the sun. A shortened week due to Year-End Holidays saw exacerbated reactions to the prevalent fears about a global economic downturn, and the few macroeconomic readings released these days only confirmed such speculation. Panic took over briefly of the financial world late Wednesday, when Apple issued a warning, downgrading its revenue forecasts, blaming it on the ongoing trade war between China and the US. And while markets recoup most of the flash crash losses, the risk is far from over. On Thursday, US President Trump advisor, Kevin Hassett said that the ongoing trade war with China will force many US companies to join Apple in announcing lower-than-expected earnings. Indeed, both countries announced they will resume talks next Monday in Beijing, bringing some temporal relief by the end of the week, but things are not easy.

In the meantime, the final December Markit PMI reports for the EU released these days showed a slower pace of growth In the Union, not to mention inflation. According to December preliminary estimates, CPI was up by a measly 1.6% YoY, well below the previous 1.9% and the expected 1.8%. Producer prices were down monthly basis by 0.3%, and up by 4.0% YoY vs. 4.9% previously, indicating slowing inflation also at factory levels. 

And while market players can't put together yet that Brexit will also hit the EU, indeed at some unconscious level, Brexit jitters weigh. PM May's deal will be submitted to the Parliament on Jan 14, and Downing Street doesn't expect it to be approved, and worse, it doesn't have a plan B.

In the US, also, the government remains on partial shutdown. President Trump refuses to re-open it unless the Congress approves his spending build to build a Wall. Talks in that front, so far headed nowhere.

The greenback gained some ground this Friday amid a solid NFP report. As Yohay Elam wrote: " The US gained no less than 312K jobs in December, far above 177K or a slightly higher number as the ADP private sector report had suggested. Revisions add another 58K. Moreover, Average Hourly Earnings are up 0.4% MoM, above projections for 0.3%. Year over year, they accelerated to a new cyclical high of 3.2%."  And, as he said, there is nothing not to like in the report, yet with soft data indicating slowing growth, any advance in US indexes, or the dollar, could be just a temporal reaction.

Soft growth in Europe, a partial US government shutdown, Brexit uncertainty, and the trade war are the knot that speculative interest needs to untie before finding its way. Nothing that can be solved next week, or the next, or the next…

EUR/USD technical outlook

The pair trades bounces modestly on Powell's dovish words ahead of the weekly close, holding below 1.1400. Range bound for a ninth consecutive week, the weekly chart shows that the price was unable to advance beyond a mild bearish 20 SMA while recoveries keep stalling below the 23.6% retracement of the 2018 decline at 1.1530. The risk of a downward extension will remain alive as long as this level remains unbroken.  In the same chart, however, the 200 SMA provides support at around 1.1300. Once below it, 1.1215, 218 yearly low is the next bearish target. Technical indicators in this chart remain directionless within negative levels, failing to provide directional clues.

In the daily chart, the technical picture is neutral-to-bearish as the price met sellers these last two weeks around a flat 100 SMA, now a handful of pips below an also flat 20 SMA, while technical indicators turned marginally lower around their midlines. So, as long as between 1.1300 and 1.1480, the pair won't be telling us much. Break of any of such extremes will expose the key levels above mentioned, while a move beyond them could fuel some directional moves.

EUR/USD sentiment poll

The FXStreet Forecast Poll favors some dollar gains for the upcoming week and month but without a relevant downward breakout expected. Bulls take the lead in the longer term perspective, up to 46% in the three-month view. The Overview chart shows that, for the three periods under study, the largest accusation of targets comes below the current price. As time goes by, the spread of possible targets is wider, reflecting the ongoing uncertainty rather than providing directional clues. 1.1200 seems to be a psychological line in the sand, as no targets below it are seen in the upcoming 4 weeks. Sentiment toward the greenback will then improve on a break below it.

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