'Likely EUR/USD target between 1.22-1.25, back to pre-QE levels' - Jameel Ahmad, FXTM

JAMEEL AHMAD
PROFILE
• Current Job: Chief Market Analyst at ForexTime (FXTM)
• Career: Worked as strategic research analyst for an international brokerage firm. Holds a BA (Hons) degree in Business Studies with Accountancy & Finance from the University of the West of England, Bristol, UK

View profile at FXStreet

Jameel Ahmad is the Chief Market Analyst at ForexTime (FXTM) Limited. Specialising in global development and the analysis of emerging markets, he is frequently quoted in a variety of leading global media outlets including the Financial Times, Wall Street Journal, Reuters, Yahoo, MarketWatch, Nasdaq, Sky News, and the New York Times.
Having worked on a variety of projects in the UK, US, Middle East and across Europe within the fields of banking, international finance and asset management, Jameel has a strong background not only in forex analysis, but also in risk management and project management.

Why has the EURUSD surged on a risk-off situation? Is the common currency responding to risk fluctuations right now or is it responding to other market dynamics? How high can it go?

I wouldn’t get too carried away with this emerging label that the Euro has become a safe haven currency. My view is that there are other market dynamics that are dictating the direction of the Euro!

Dollar weakness is a significant contributor and we have seen this trend in the past; when there is Dollar weakness, the correlation it encourages in terms of Euro strength is one of the easiest for traders to spot. The Euro did manage to peak at levels not seen since early 2015, at the same time that the Dollar dropped to its lowest levels since January 2015.

At the moment, investors are using any reason possible to buy the Euro, and they are also pricing in as much hawkish news from the European Central Bank (ECB), as can be expected before the next interest rate decision in September. The ECB will not be comfortable with the rapid appreciation in the Euro, but traders also know that the ECB will not be in a hurry to make changes to monetary policy. They want to price in as much in the Euro as they can, before taking profits on a pair that has rallied close to 14% year-to-date.

The likely eventual target for the EURUSD is probably between 1.22 - 1.25, which was roughly where the Eurodollar was trading, before traders priced in the fact that the ECB were set to announce its QE stimulus in January 2015. With expectations increasing that the ECB are going to announce an unwinding of QE as soon as September, we can consider the rally in the Euro over recent months, as “going full circle”.

Is the USD oversold and entering a correction? 

The USD is horrifically oversold on an economic basic, and I do think that traders need to remain mindful before jumping into any more selling positions, because the Dollar short is really starting to look like a crowded trade.

Investors need to pay very careful attention to where the Dollar concludes this month; if the Dollar Index does manage to conclude trading below 92, it increases the bias towards more sellers flooding the market. This could take the USD to levels not seen since investors began to price in that the Federal Reserve would raise US interest rates two years ago.

At the same time, this is a critical technical level for the USD (Dollar Index longer time frames) and it is very possible that the Dollar could attempt a bounce higher from these levels.

The problem is that despite the Dollar looking like a tempting buy as it is clearly oversold, the external catalysts that have encouraged the Dollar dive are something that investors are unable to ignore.

92 on the Dollar Index is definitely the level to watch, but the anxiety over problems such as Trump uncertainty, geopolitics, Nafta, plus many more (!) are also significant enough to send the Dollar crashing right through its psychological support.

Is JPY a safe-haven when the North Korean missiles are actually pointing at Japan?

When there is any financial market uncertainty, never underestimate the power that the Japanese Yen has as a safe haven currency. I always say that the Japanese Yen is your best friend in times of risk aversion.

The Yen will most probably remain as a favourite asset for traders in times of market uncertainty; this will be the case even if the North Korean geopolitical risks escalate to intense levels.

The North Korea situation is not the only conflict the Trump administration is facing right now: Has the USD been punished because of the political turmoil in the US?

There are so many different factors behind the dive in the Dollar, including the increased political risk in the United States, among many other things. Uncertainty is the name of the game when it comes to the Trump presidency, and the Dollar is falling victim to this.

One new emergence that I think investors need to at least monitor, is the indication from Jackson Hole that Federal Reserve Chair Janet Yellen might be replaced at the end of her term in early 2018, by someone who is more supportive towards financial deregulation. Trump is obviously well-known for wanting to bring in deregulation; Yellen’s comments in support of the current regulation has increased the likelihood that the current Director of the National Economic Council Gary Cohn will replace her. 

This might not be an issue for investors to take into account for now, but with all the increased political risks that are facing the Dollar, it is possible that the risk of central bank independence will be added to the list later down the road.