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FX Traders' weekly EURUSD fundamental & technical picture, this week's market drivers that could change it, and what you must never forget about the EU and EUR
The following is a partial summary of the conclusions from the fxempire.comweekly analysts' meeting in which we share thoughts about what's driving major global asset markets. The focus here is on the EURUSD's weekly outlook for forex traders, from both a fundamental and technical perspective.
- Short term technical picture, fundamental drivers, and entry/exit points
- Longer term bearish fundamentals you can’t afford to forget
- ECB Easing Deferred?
Outlook: Short Term Neutral/Bullish
The Bullish: Risk Appetite, EURUSD Regain Upward Momentum
Risk appetite has recovered, as shown in our sample weekly charts of 9 leading global stock indexes here, where we note that US and European stocks have regained their double Bollinger band buy zone, suggesting that momentum is again strong enough to expect it to continue until it drops out of the buy zone.
EURUSD Weekly chart May 2013 – Present
KEY:10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange
03 Mar. 01 23.17
As the chart above shows, the EURUSD trend is tracking that risk appetite, as both global indexes and the EURUSD just closed their fourth straight weekly advances, and the EURUSD has also re-taken its double Bollinger band buy zone.
The Bearish: Long Term Resistance at 1.3800, 1.3900
The only real bearish aspect of the technical picture is this longer term, and presumed strong, resistance. However as long as the pair keeps rising along with the US and EU indexes, these resistance points look as vulnerable as earlier ones proved to be.
New Long Entry Points For Weekly Chart Traders
A pullback to the bottom of its double Bollinger band buy zone around 1.3750, assuming the pullback is not driven by any really bearish news. This price level was also strong resistance since December 2013 until this past week, and so now becomes the nearest presumed strong support level
A deeper pullback to the 1.3650 area followed by a bounce higher that confirms support at this level, which has not only proven to be strong resistance and then support in the past months, it also includes support from the 10 and 20 week EMAs, as well as from the 61.8% Fibonacci retracement of the last EURUSD pullback that occurred from January to early February.
A break above the 1.3800 level (confirmed by whatever indicators you use to confirm breakouts) opens the way for a test of the 1.3900 level that was tested and held in the final weeks of 2013.
New Short Entry Points: Only For Short Term Traders
Given that the pair has been closely tracking overall risk appetite as portrayed by US and European stock indexes, any of the following short entry points should only be attempted if the indexes are pulling back as well.
A failure to break over 1.3800 suggests a test of support around the 1.3740
A break below 1.3650 opens the way for a test lower.
However as the chart above shows, a sustained pullback would need to surmount a closely packed series of support points.
So unless we’ve some huge new bearish fundamental driver (like a major change in expectations in the pace of ECB easing or Fed tightening), playing these pullbacks is more for those trading short term moves off of daily or intraday charts.
Indeed unless we see some significant breakdown like we saw in late October (taper started), something that takes the pair back into its descending channel (that it exited 3 weeks ago), we wouldn’t have confidence in a sustained move lower.
Near Term Fundamentals Driving The Current Uptrend
The two big fundamental drivers of the pair, risk appetite and interest rate differentials, have not changed in recent weeks.
US data has softened, but that’s been deemed a temporary effect of bad weather. So US data has not been bad enough to dampen risk appetite, but has not been good enough to suggest any acceleration of the QE taper or timetable of actual US benchmark interest rate increases.
Meanwhile the slight rise in EU inflation late last week reduced the chances of any imminent new ECB easing, thus giving the EUR a boost on Friday.
So What Could Reverse The EURUSD Uptrend In The Near Term?
There are only two ways that’s likely to happen – a strong burst of risk aversion or a sudden widening gap (real or anticipated) in the respective benchmark interest rates of the EUR and USD in favor of the dollar.
Neither the Fed nor ECB is expected to shock us with new policy shifts, so we don't see any sudden USD rate advantage.
The Ukraine situation clearly has potential to crank up fear if anyone believed the EU or US was ready to step up, (cue sounds of crickets chirping on a quiet night....). Ok, maybe some economic sanctions, at most, maybe.
The most likely obstacle is reversal in risk appetite that shows up on the leading global stock indexes too. We suspect the most likely catalyst will be the dawning realization that recent weak US data reflected some actual weakness. For details on why see our post here.
The packed economic calendar discussed below is the other likely source of near term EURUSD drivers. It is more likely to be market moving if the top tier events have a clear bullish or bearish theme. Given the revived uptrend in both risk appetite and the EURUSD, mixed data favors a flat-to-higher move.
Major EURUSD Calendar Events
The coming week’s calendar is a typically packed first week of the month, with plenty of events to influence the two fundamental EURUSD drivers: overall risk appetite and speculation on relative EUR and USD interest rate differentials (aka speculation on the likelihood ECB and Fed policy changes). Top events include:
Monday: Manufacturing PMIs
China data dump: Manufacturing and non-manufacturing PMIs
EU data dump: Spain, Italy, EU manufacturing PMIs, Draghi speech
US Manufacturing PMI (NB: its jobs component is considered a leading indicator of the Friday monthly jobs reports).
Wednesday: EU, US Services PMIs, US ADP report
EU: Spain, Italy, EU services PMIs, retail sales
US: ADP non-farms payrolls (leading indicator of the official monthly BLS report Friday) Services PMI (its jobs component is one of THE leading indicators for the Friday jobs reports).
10 year bond auctions for France, Spain, and Germany will show us if peripheral debt demand is still strong and if yields are still falling compared to those of Germany.
ECB rate statement and press conference, could provide new insights on ECB views on the EU’s economy and plans for further easing, if any.
Monthly Official BLS Jobs reports: NFP, unemployment, average hourly earnings.
China Trade Balance
Remember: Longer Term Fundamental Drivers Are Bearish
Although much was made this Friday of the better than expected EU inflation data, remember that
The 0.8% CPI figure is still well below the ECB’s target and that the deflation threat is not gone.
Despite the calm since the summer of 2012, this is the same crisis prone EU that is only missing a catalyst to remind everyone that nothing has been fixed and that the EU is no more capable of dealing with a major sovereign or banking solvency issue in the periphery. The underlying reason is the same one that stymies every attempt to centralize financial control and common funding for aiding weaker EU economies. The popular support isn’t there.
Rising Deflation Threat Brings QE-EU Closer
Although the ECB has so far been sanguine about deflation, as we wrote in our January 4th article, Coming 2014 Explosion: EU Money Supply or EU Itself?, some kind of official money printing/QE program is just a matter of time. Unofficially it has begun in small steps via periodic failures to sterilize ECB purchases of GIIPS bonds since December.
It’s just a matter of time before somebody needs a chunk of cash from the EU that isn’t currently there.
The OMT thus far is an untested program, unwanted by debtor nations because of the conditions it imposes, and also thus far remains illegal as far as Germany is concerned.
The December single resolution mechanism (SRM) is ineffective in its current form, labeled by US Treasury secretary Jack Lew as too small and too slow to work.
Don’t believe me? BNP Paribas bank joined me this week, saying that new stimulus measures are in the pipeline.
Asset purchases are increasingly necessary in order for the ECB to meet its primary objective of maintaining price stability. Inflation in the euro area has persistently surprised to the downside, eroding the safety margin against deflation. „ Additional conventional policy easing will not deliver sufficient monetary accommodation for the price stability mandate to be met. Thus, the ECB will reluctantly have to follow other central banks into balance sheet expansion via asset purchases.
Highlights from the Reuters post include:
- Annual EZ inflation is 0.7%, far below the ECB’s 2% target over the medium term and believed likely to remain very low for the foreseeable future, with some economists seeing further CPI– Goldman Sachs predicts just 0.4% for March.
- BNP Paribas predicts unsterilized ECB sovereign and corporate bond purchases of €300 to €500 billion in its first stage, QE-EU #1 and that it will start in H2 of this year.
- Assuming that the ECB focuses its efforts on keeping GIIPS borrowing costs down, the bank foresees a drop in Spanish and Italian government borrowing costs of 60-80 basis points across the curve as the idea takes hold, with further declines possible after QE starts. ƒ
- Challenges include:
- Getting agreement from the ECB’s 24 members on the details of the program
- Possible legal challenges similar to Germany’s objections to the OMT program, though the bank believes in the end the EU will adapt laws to suit the circumstances.
- It may well be too little too late, given that most of the EZ’s weaker economies are already buckling under the burdens of high debts, austerity programs, high unemployment and thus weak spending and growth.
Regarding point #3, we have trouble believing it. We note that yields have already fallen to 3.54% for Spanish and Italian 10-notes. That’s just 87 basis points more than yields on 10-year US Treasury notes. If these yields are due to fall more than 60-80 bps, they’d be yielding virtually the same or LESS than their far less risky US counterparts.
BNP Paribas is still among the first of the major banks to predict the ECB fires up the printing presses. Maybe I’ve got some readers there?
Note that despite the threat of coming ECB stimulus to the EUR, we have repeatedly warned traders of any EUR currency pairs to avoid shorting the EUR (or anything else, ever) until we get some actual technical confirmation of a downtrend.
Real Time Retail Trader Positioning Sample – Increasingly Crowded Short Position
Our real time sample of retail traders from forex factory.com has shown that most retail traders have not heeded this advice over the past months and have paid the price.
04 Mar. 02 00.35
Indeed over the past week they’ve become a bit more short the EURUSD. Last week they were 29% long, 71% short the EURUSD. Now they’re 24%/76% long/short. Odd. Their average holding period is 8 weeks, so these are intermediate term traders who would be looking at weekly charts as I have.
See here for more weekly articles on the prior and coming week in global markets.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.