EUR/USD bears awaiting hat-trick of good news

The growing disparity between monetary policies in the US and almost all the other major central banks is the name of the game in the FX markets right now. In the US, the Federal Reserve may have turned a little less hawkish since the summer, but it still remains the front runner in the race – for the lack of a better word – to hike interest rates first. Indeed, the FOMC statement turned out to be more hawkish than had been expected as my US colleague Matt Weller highlighted last night. The Fed once again raised the prospects for a rate hike in December and the markets responded by buying the dollar and selling everything else priced in the US currency, including precious metals. The probability of a December rate hike has now risen to just below 50 from around 30 per cent previously, according to the Fed Fund Futures. Out of the major central banks which are or turning more dovish are the European Central Bank, the Swiss National Bank and the Bank of Japan, with the latter scheduled to announce its decision on monetary policy tomorrow. The dollar bulls are thus spoilt for choice.

However the EUR/USD has managed to bounce back a touch after receiving a double whammy of bearish news as the ECB turned more dovish and the Fed remained surprisingly hawkish in recent days. It has been supported in part because of profit-taking as we will have the Advance US third quarter GDP estimate out at 12:30 GMT. Will it be a hat-trick of good news for the bears? The world’s largest economy is expected to have expanded at a moderate pace of just 1.6% in Q3 in an annualised format. If correct, it would mark a sharp slowdown from the previous quarter’s growth rate of 3.9%. The euro meanwhile has also been supported by stronger-than-expected European data this morning, with German unemployment falling by a bigger than expected 5,000 in October and the EU's Economic Sentiment index hitting its highest level since 2011.

Ahead of the US GDP data, the EUR/USD is holding its own slightly above the 61.8% Fibonacci retracement level of the upswing from the March low, at 1.0940. Yesterday, the advance at previous support and the backside of the broken trend line was rejected sharply at just shy of 1.1100; this is now a major resistance level going forward. The low from last week of around 1.1000 is another key resistance to watch. On the downside, there are not many further short-term supports seen until the summer lows of around 1.0800/20. Below there, the 78.6% Fibonacci retracement comes in at 1.0730 and then there is nothing significant until the psychologically-important 1.05 handle followed closely by the March low at 1.0460. To parity and beyond I would imagine if US data starts to surprise to the upside from now until the Fed’s December meeting, starting with Q3 GDP today.