EUR/USD Forecast: the world conspired against the greenback

  • All hell broke loose… a couple of times this week.
  • EUR/USD overextended, but no technical signs of exhaustion upward.

The greenback opened the week with a strong footing, as despite missing market's expectations, Nonfarm Payrolls released last Friday weren't enough to take US policymakers away from the tightening path. Furthermore, Fe's officers speaking in different events, backed the case for three rate hikes this year, boosting the American currency further. All hell broke loose on Wednesday when a news agency released a headline indicating that Chinese officers were recommending  halting or reducing buying of US Treasury yields. For the dollar, it was all the way down from there, despite China's government denied the news the next day.

The EUR/USD pair recovered the 1.2000 threshold, and extended its gains on Thursday, as US PPI came below expected,  with producer prices falling for the first time in over a year, resulting at -0.1% in December, amid declining costs for services. The Minutes of the latest ECB meeting, added fuel to the fire, reminding speculative interest how optimistic policymakers are on economic growth.

Early Friday, headlines indicating that German parties have achieved a breakthrough in talks aimed at forming a government, sent the pair past 1.2100 for the first time since January 2015, while tepid US inflation and sales data, kept the pair at multi-year highs.  Despite US core inflation posted its biggest gain in almost a year, it remained well below Fed's 2% target, up 0.3% in the month and1.8% from a year earlier. Retail Sales in December, posted an expected modest advance of 0.4%.

So what happens now? Well, firstly, the week is set to start in slow motion with the US on holidays, and no relevant data coming from the country until Thursday, when housing figures and a Fed manufacturing survey will be out. In Europe, however, the macroeconomic calendar will be more busy, with data releases spread all through the week, and including EU inflation.

Secondly, even the most distracted knows that Draghi & Co. would prefer to see the pair below 1.2000, as a stronger currency means lesser inflationary pressures, so jawboning should not impress investors.

Finally, the US Central Bank has become irrelevant, with Yellen going out and Powell coming in, in February. There's nothing that the current policymakers can do or say, as the market waits for the new composition of authorities to start paying back attention.

That said, seems the market won't have many reasons to turn bullish on the greenback.

Technically, the momentum upward is strong in almost every possible time frame, as the pair pressures its multi-year high at the end of the week, trading in the 1.2140 region. In the weekly chart, the pair surged after nearing a bullish 20 SMA, while technical indicators surged to 5-month highs, maintaining their bullish slopes, in line with additional gains ahead. Technical indicators in the daily chart also support a continued advance, as the pair held above a bullish 20 SMA, struggling around it mid-week before surging, while technical indicators turned north almost vertically, now approaching overbought readings.

The bullish run has been fast and furious, so a downward correction can't be dismissed, yet at this point, the rally is set to continue. The pair has an immediate resistance at 1.2150, with gains above the level opening doors for an extension up to 1.2260, a strong static resistance area. Bulls and bears should battle around this last, but if bulls win, 1.2300 seems likely for next week. The 1.2090 price zone is the immediate support followed by the 1.2000 threshold. Below this last, the pair can extend its decline back to the 1.1920 region, but chances are limited, and buyers will likely defend the 1.2000 area.  

Sentiment towards the pair is mixed according to the FXStreet Forecast Poll, as weekly basis, the number of bulls and bears is even at 43%. The average target, however, stands at 1.2152, while the Overview chart shows a clearly positive trend weekly basis, for the first time in over three-month.  Compared to the previous week, when the sentiment was bullish, the average target is over 200 pips higher.  Bears are a small majority in the 1-month view but grow sharply in the quarterly one, as 76% of the polled experts favor a decline, weighed mostly by banks, which are the ones betting for further slides. The average target in this last time frame, however, is unchanged, with investors seeing the pair at mid 1.18. The trend flattens in the Overview chart in the largest perspective, but compared with a couple of weeks' ago sentiment, the largest amount of possible targets have also been increased by around 200 pips, somehow suggesting that the latest run is convincing investors that is not all about diverging monetary policies.


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