EURUSD Analysis: Big picture technicals
EUR/USD News (Euro US Dollar)
EUR/USD extends recovery as Wall Street regains ground
Ebbing concerns play against the greenback this Friday, moreover, after EUR/USD touched October low, triggering some profit-taking ahead of the weekend. EUR/USD nears 1.1500.
EUR/USD latest news
EUR/USD latest analysis
1. Technical Overview
The pair struggles with 1.1460 at the time being, unable to regain ground above the strong static resistance level. In the 4 hours chart, the price remains far below bearish moving averages, which accelerated their slumps. The 20 SMA, now converges with the 23.6% retracement of its latest decline at around 1.1520, reinforcing the resistance area. Below the 1.1430 level, the pair has room to extend its decline down to 1.1300, the yearly low settled last August.
Support levels: 1.1430 1.1400 1.1365
Resistance levels: 1.1490 1.1525 1.1575
EUR/USD PRICE SENTIMENT
EUR/USD BULLISH PERCENTAGE INDEX
EUR/USD Pivot points
EUR/USD trading positions
2. Fundamental Overview
The EUR/USD pair fell to 1.1432, reaching the area for a second time this month, now trading a few pips above it and at risk of breaking lower. The pair broke lower Thursday amid risk aversion fueling dollar's demand. Much of such fears were triggered by renewed tensions between the EU and Italy over the budget of this last. On Thursday, Brussels warned Italian minister Tia that the 2019 budget draft points to a “particularly serious non-compliance with the budgetary policy obligations laid down” in European rules, with a deficit of a roughly 2.9%. Italian government bond yields are skyrocketing with the spread with German counterparts at multi-year highs. The Euro area balance of payments for August came in at €23.9B vs. July €19.5B, when seasonally adjusted, but had no effects on the pair. Later today, the US will release Existing Home Sales for September, seen down by 0.7% MoM.
Meanwhile, European equities trade lower, indicating that risk aversion continues dominating market's mood, although the declines are moderate at the time being.
EURUSD FUNDAMENTALS TODAY
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3. Big Picture
Themes affecting the EUR/USD
- BEARISH THEMES FOR THE USD
- BULLISH THEMES FOR THE USD
- BEARISH THEMES FOR THE EURO
- BULLISH THEMES FOR THE EURO
- A recession in the U.S. may cause the Fed to reverse policy or at least to slow the pace of tightening its monetary policy.
- Loss of confidence in the dollar and the creditworthiness of the United States.
- Gradual exit of easy monetary policy abroad and gradual rise of interest rates in part of the rest of the world.
- China announced the creation of an oil futures contract that will be denominated in Yuan and convertible into gold.
- The USD tends to perform relatively poorly when the US fiscal situation is weaker, as the current account weakens.
- A ‘Fed inexperience risk premium’ could be discounted in the dollar as a result of a range of newcomers entering the Fed.
- There could be risk for a period where the US Dollar correlated with stocks on the way down.
- Delays in the cuts to corporation tax would hit yields of longer dated Treasuries while shorter dated yields would hold up (flattening of the curve).
- We may not be able to accurately assess trend US inflation dynamics until 1H18.
- Trump is reportedly set to unveil NAFTA proposals that may ‘throw the deal into peril’.
- Rise of money supply and USD liquidity: M1 and M2 continues to climb, mitigating the the increase in interest rates.
- Investors using the USD to hedge their bets on the Fed, just in case they back down from their rate-hiking cycle.
- Protectionism: when introducing barriers to trade, currencies of countries with current account deficits tend to suffer.
- Due to regulatory changes in U.S. money market, it may now be no longer advantageous to issue debt in U.S. dollars.
- The Fed shrinking the balance sheet instead of raising the policy rate.
- China's threat of selling a big chunk of those dollar reserves.
- The USD is in a 15 year super cycle decline.
- Libor has risen sharply over OIS, highlighting the tightness in dollar funding.
- Yield spreads (specially premium over Germany and Japan) should gravitate in the USD’s favour as the Fed Funds rate extends its glacial ascent above other key cash rates.
- The market hasn’t fully priced the upcoming rate hike together with the balance sheet reduction program, which may be more aggressive than some in the market had expected.
- The Fed’s balance sheet shrinks relative to the ECB and the BoJ’s balance sheets.
- Changes in tax policies are expected to create a huge demand for US dollar abroad because of repatriation of dollars back to the U.S.
- When the debt ceiling is lifted, the adjustment of the US Treasury cash holdings will drain around $400 bln of liquidity via mostly bill sales, raising dollar premium on cross currency swaps.
- Regulatory incentives may also influence the availability of dollar funding.
- The Fed will have a more hawkish tilt in 2018 with the new nominations. Jerome Powell indicated his preference for normalization of interest rates and maintaining that the Fed's balance sheet unwinding program.
- Wall Street friendly Fed chairman, Treasury secretary, and Council of Economic Advisers, forming a complete deregulatory trio which is positive for U.S. stocks and the Dollar.
- Fiscal policy will overtake the monetary policy in stimulating the US economy. Tax cuts could reduce the trade deficit by half.
- Repatriation: many U.S. corporations are expected to repatriate their earnings before the year closes to lower current tax obligations, creating a shortage of offshore dollar funding in the Eurodollar market.
- The Fed will have to extend swap lines all over the world to allow some dollar liquidity but rates are going higher for this.
- Countries accumulate U.S. Dollars because the U.S. runs a trade deficit, and those Dollars will eventually return to the U.S.
- Oil being traded in other currencies does not impact the value of the Dollar.
- Chinese central bank to buy US Treasuries: the PBOC looks keen to defend its FX reserves at USD 3 trillion level, and it may not be comfortable with its currency rising too quickly.
- China’s central bank removed the reserve requirement of 20% for trading foreign currency forwards, for example, buying dollars through currency forwards.
- In an unwind risk-off scenario, the USD strengthen on safe-haven flows.
- Since Bretton Woods’ currency arrangement, there is no clear, viable, and compelling alternative to the U.S. Dollar as the main reserve asset.
- Investors are paid to be long the dollar against most major currencies, a cheap way to hedge European or Japanese exposure.
- Increasing deposits in emerging markets currencies funded by borrowing in USD (yield hungry international investors are happy to have exposure given the better economic situation in EMs).
- Some EU members, with the support of President of the European Council, Donald Tusk, intend to block Britain from euro clearing.
- Growth has converged, but monetary policy has not. Experts argue peak divergence - on the respective balance sheets - is still ahead.
- Germany continues to grapple with its political troubles and the possibility of facing new elections in 2018.
- The Euro’s appreciation is likely to spur the ECB's policy response, most likely verbal intervention on the euro being too strong.
- The credibility of the ECB could be affected if the environment changes forcing the central bank to renege on its earlier guidance. Rates may not rise until well after the end of asset purchases, which would push the first rate hike out to 2019.
- ECB tightening could increase the borrowing costs for countries like Italy and Spain.
- Italy will hold an election in March: polls show a close race between the center-left PD, the Five-Star Movement and a center-right bloc of Berlusconi's Forza Italia and the Northern League.
- In Italy, each of the four main parties opposing the Democratic Party subscribe to the introduction of a parallel currency to rival the Euro.
- Despite the cyclical recovery, core inflation still shows no sign of a convincing upward trend (low wage growth).
- German industry is competitive at stronger euro levels though the cost structure of other economies is not as favourable.
- The lending capacity of the ESM could be tested in the event of another recession in the Eurozone.
- Bundesbank Target2 Balance shows peripheral Europe owes Germany a new record high €860 billion. To prevent runs on banks the EU is investigating a scheme to freeze bank accounts. The next logical step is ban on cash altogether.
- The European banking system is over-leveraged and under-capitalized. The SRF is being built-up over a period of eight years (2016-2023). The target size is intended to be at least 1% of covered deposits by end 2023-not enougth to offset the over €1 Trillion Nonperforming EU Loans.
- The ECB contained its interest rates far to long. Add QE in the mix then the exchange rate becomes misplaced and trades at incorrect levels- a giant breakdown in the exchange rate is possible.
- For the first time since 1951, Europe’s political centre of gravity can shift from the Franco-German couple to CEE (Austria and the Visegrad 4 lobby).
- Structural factors like the slow growth in working age population, and th rise in life expectancy, will continue to depress potential growth and thereby the natural rate of interest.
- The ‘new normal’ for monetary policy in the euro area involves a large ECB balance sheet even if the economic situation normalises due to high demand for HQLA.
- The regulatory demand for HQLA, including deposits at ECB and disincentive to take on short-term funding, should put downward pressure on short-term money market rates.
- Reinvestments on maturing bonds ‘for an extended period of time’ after the end of the net QE purchases implies that the ECB’s balance sheet will remain large for some years to come (even if the economy improves).
- Currency alignment informs EUR/USD is still on a massive correction from 1.0300's.
- Spain’s government invoking Article 155 of the constitution suggest things could get messy in Spain, discourage investment, and inspire other fractures across the region including in Italy.
- The Italian banking system collapse: there are 1 trillion euro of non-performing loans in Europe. A quarter of them or so are in Italy, another 15% in Greece, and another 15% in Spain.
- Grece: serious structural, fiscal and political problems remain and they will inevitably resurface in due course.
- EUR has probably benefited from unhedged equity inflow and is vulnerable to a correction in equities.
- Mario Draghi's focus on growth and comparatively mild emphasis on the strong euro is seen as an endorsement to the EUR rising.
- The Euro has increasingly become a funding currency, amongst others because rates are so low, speculators are borrowing in euros to buy higher yielding assets. In a risk off event, those speculators might have to reduce their bets and, as part of that, buy back the euro.
- The euro may be a diversifier for those concerned about risk assets.
- European banks are no longer able to tap into U.S. Dollar funding at the same favorable terms, as evidenced by the higher LIBOR rates. Their clients may well decide to no longer seek a U.S. dollar loan, but instead a euro-denominated loan.
- Given the negative rates offered by the ECB and the short-end of the curve, ample liquidity, favorable deposit-to-loan ratios, and lukewarm demand for credit from households and non-financial businesses, some will opt to repay their borrowings under the TLTROs early. This would have the effect of reducing the central bank’s balance sheet.
- Eurozone capital flows should eventually reverse from currently large outflows to become inflows as the ECB embarks on a path to normalisation of policy.
- Euro residents may repatriate funds as rates appeal rise and foreigners (e.g. Japanese investors) may eventually start to buy euro debt.
- Capital inflows are inherently related to the ‘natural flow’ via the balance of payments (which is ultimately a EUR positive due to euro balance-of-payments surplus).
- Various economic indicators showed the region’s growing speed has reached the fastest in past 10 years.
- Interest rates nay travel much higher than expected and with it EUR pairs go higher. European interest rates are low, artificial, contained and should be far higher. European money supplies are far overbought and should be much lower.
- Risk reversals reflect their highest EUR call bias across the curve since 2009.
- The EU is in control of the Brexit negotiations at this point.
- Real rates have room to move higher, especially relative to U.S. rates as progress is being made by the ECB.
- The treatment of troubled banks will be clearer once the EU's minimum requirement for own funds and eligible liabilities (MREL) is in place.
- It's about momentum: Europe (or at least Germany) has far more momentum than the U.S. Also faster rising European yields - not only in the Bund, but elsewhere in Europe too, attract EUR and European stocks buyers.
- The Austrian ECB member of the governing counsel suggested that there are many different rates and, yes, some could be raised before the bond purchases are done.
Influential Institutions & People for the EUR/USD
The Euro US Dollar can be seriously affected by news or the decisions taken by two main central banks:
The European Central Bank (ECB) is the central bank empowered to manage monetary policy for the Eurozone and maintain price stability, so that the euro’s purchasing power is not eroded by inflation. The ECB aims to ensure that the year-on-year increase in consumer prices is less than, but close to 2% over the medium term. Another of its tasks is the one of controlling the money supply. The European Central Bank’s work is organized via the following decision-making bodies: the Executive Board, the Governing Council and the General Council. Mario Draghi, member of the Executive Board, is also the President of this organism.
ECB Official Website, on Twitter and YouTube
On the other
FED Official Website, on Twitter and Facebook
Mario Draghi
Mario Draghi is member of ECB's Executive Board and also the President of this organism. His declarations are an important source of volatility, especially for the Euro and the currencies traded against it. Born in 1947 in Rome, Italy, he graduated of the Massachusetts Institute of Technology and became President of the European Central Bank in 2011. Draghi gives press conferences in the back of how the ECB observes the current European economy. His comments may determine positive or negative trends for the Euro in the short-term. Usually, a hawkish outlook is seen as positive/bullish for the EUR, while a dovish one is seen as negative/bearish.
Draghi on ECB'S Profile and Wikipedia
Jerome Powell
Jerome Powell took office as chairman of the Board of Governors of the Federal Reserve System in February 2018, for a four-year term ending in February 2022. His term as a member of the Board of Governors will expire January 31, 2028. Born in Washington D.C., he received a bachelor’s degree in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. Powell served as an assistant secretary and as undersecretary of the Treasury under President George H.W. Bush. He also worked as a lawyer and investment banker in New York City. From 1997 through 2005, Powell was a partner at The Carlyle Group.
Jerome Powell Fed's Profile and Wikipedia
ECB NEWS & ANALYSIS
FED NEWS & ANALYSIS
About EUR/USD
The EUR/USD (or Euro Dollar) currency pair belongs to the group of 'Majors', a way to mention the most important pairs in the world. This group also includes the following currency pairs: GBP/USD, USD/JPY, AUD/USD, USD/CHF, NZD/USD and USD/CAD. The popularity is due to the fact that it gathers two main economies: the European and American (from United States of America) ones. This is a widely traded currency pair where the Euro is the base currency and the US Dollar is the counter currency. Since the EUR/USD pair consists of more than half of all the trading volume worldwide in the Forex Market, it is almost impossible for a gap to appear, let alone a consequent breakaway gap in the opposite direction.
Normally, it is very quiet during the Asian session because economic data that affects the fundamentals of those currencies is released in either the European or U.S. session. Once traders in Europe get to their desks a flurry of activity hits the tape as they start filling customer orders and jockey for positions. At noon activity slows down as traders step out for lunch and then picks back up again as the U.S. comes online. If there is important U.S. data we can expect quiet markets just ahead of the number. U.S. economic news have the ability to either reinforce an existing trend or reverse it depending on by how much it missed or beat expectations with the EUR/USD news. By 5:00 GMT liquidity leaves the market once again as European traders close out positions and head home.
EURUSD YEARLY FORECAST
Related pairs
GBP/USD
The GBP/USD (or Pound Dollar) currency pair belongs to the group of 'Majors', a way to mention the most important pairs worldwide. This group also includes the following currency pairs: EUR/USD, USD/JPY, AUD/USD, USD/CHF, NZD/USD and USD/CAD. The pair is also called 'The Cable', reffering to the first Transatlantic cable that was crossing the Atlantic Ocean in order to connect Great Britain with the United States of America. This term was originated in the mid-19th century and it makes GBP/USD one of the oldest currency pairs in the world.
The popularity of the Pound Dollar is due to the fact that represents two strong economies: British and American (from United States of America). The Cable is a widely observed and traded currency pair where the Pound is the base currency and the US Dollar is the counter currency. After the result of the Brexit referendum, where the majority of the British voted to abandon the European Union, GBP/USD has been suffering some turbulence in the Forex market as a consequence of the associated risks of leaving the single market.
USD/JPY
The USD/JPY (or US Dollar Japanese Yen) currency pair is one of the 'Majors', the most important pairs in the world. Japanese Yen has a low interest rate, normally used in carry trades, that's why is one of the most trades currencies worldwide. In the USD/JPY the US Dollar is the base currency and the Japanese Yen is the counter currency. The pair represents American (from United States of America) and Japanese economies.
Trading the USD/JPY currency pair is also known as trading the "ninja" or the "gopher", although this last name is more frequently used when reffered to the GBP/JPY currency pair. The US Dollar Japanese Yen usually has a positive correlation with the following two pairs: USD/CHF and USD/CAD. The nature of this correlation is dued to the fact that both currency pairs also use the US Dollar as the base currency, such as USD/JPY. The value of the pair tends to be affected when the two main central banks of each country, the Bank of Japan (BoJ) and the Federal Reserve Bank (Fed), face serious interest rate differential.