EUR/USD Monthly Forecast – February 2019

There is a chance for a high level of bearish price action in the month ahead given the fact that all major geopolitical events are currently in a critical position and outlook for future progress is heading in a dovish direction.
Colin First

The price action in EURUSD pair was highly volatile across the month of January. However, a look at weekly and monthly chart clearly shows that price was little changed at end of the month. Geopolitical events remained the main driving force behind price action of the pair across the month similar to price action in 3rd Quarter of FY2018-19. Despite clear indication of positive proceedings in major political and economic events, none of them show any signs of resolution in near future. With deadlines for two of most anticipated and followed events nearby they dominated price action across the month and are expected to continue influencing price action during February 2019 as well. The two events have been wreaking havoc for quite some time in the market now that even people living under the rock are familiar with them namely – Brexit & Sino-U.S. Trade War. Both the events have been active across all three financial quarters of the ongoing financial year and resulted in historic declines immediately after global markets experienced one of its finest pace of economic growth in FY2017-18. The first week of January saw subdued price action owing to caution ahead of key political and economic events set to follow shortly resulting in pair closing in red for the first week of January 2019.

Headlines on Sino-U.S. Trade Talks & Fed’s Portfolio Shrinking Plans Underpinned EURO Bulls

While price action was positive at the start of the week, gains were capped owing to cautious market sentiment as traders’ awaited speech from previous and current US Federal Reserve Chairpersons. However, comments made by Fed Chair Jerome Powell and his predecessors during their speech at end of the first week hinted at U.S. Federal Reserve taking a dovish stance towards rate hike plans for 2019 which caused US Dollar to weaken across broad market helping the pair close well above weekly lows. The second week of January saw Euro climb steadily owing to optimism surrounding Sino-U.S trade talk. This event was the first face to face talks between representatives of both nations after December’s G-20 Summit. Headlines hinted at progress during talks despite the event unexpectedly extending for the third day resulting in the pair hitting monthly highs near 1.1569. However, no details on what topics were discussed during talks hit the market. Further news of an unexpected visit from North Korean leader Kim Jong Un with an itinerary to stay in China for a couple of days when talks between China & U.S. were in progress inspired a fresh wave of bearish influence in a market resulting in EURO moving downwards erasing all gains made early in the week. North Korean Leader Kim Jong Un’s new year statement which contained a veiled threat to the U.S. just ahead of his visit to China was the main reason for investors caution resulting in the pair in red. The third week saw pair extend previous week’s decline owing to a multitude of bearish events.

The pair sustained sharp losses as UK parliament voted down PM May’s Brexit deal with the US. The outcome of parliament meeting was as widely expected with MP’s rejected PM May’s deal while PM May managing to win the vote of confidence against her. While the outcome was mostly priced in by traders across the market, dovish comments from ECB President Mario Draghi and US Dollar’s modest recovery owing to slight rebound of US Treasury Yield near the end of third week pressured EURO into sharp downwards price action across the week resulting in the pair seeing bearish closing for the week. EURO was further pressured by disappointing Chinese GDP data, IMF’s reduction of growth forecast for 2019 at the start of the week. Political power struggle stemming from Italy as Italy’s “Anti-EU Axis” activities saw key figures trying to gain dominance and power over their counterparts in Germany and France increasing bearish pressure on EURO resulting in the pair trade range bound near third-week lows for most of the week. However the pair managed to recover from weekly lows and close positive on the fourth week as American market hours on last trading session of the week saw U.S. President Donald Trump temporarily reopen government for three weeks and wall street journal reported that the Fed is likely to stop shrinking their balance sheet earlier than expected resulting in positive closing for the week. The fifth week saw positive price action with EURO moving back near monthly highs as US FOMC members stated that future interest rate decision will depend on the economic performance of U.S.A and that there is a chance for even reducing rates instead of hiking depending on economic progress in U.S. markets. Fed Chair Powell further stated that their portfolio shrinking activities is likely to end earlier than expected as ongoing trade war with major global economies and the partial shutdown of U.S. government took a significant toll on U.S. economy.

Brexit Chaos, E.U.-U.S. & China-U.S. Trade Talks Likely To Push EURO Into Bears Territory

This caused the dollar to suffer a sharp decline in market helping EURO gain momentum despite the lack of fundamental support ending the month of January on a positive note. However, the month ahead looks gloomy for EURO as the currency has a clear lack of fundamental support to sustain positive price action and UK parliament session during last week of January brought back Brexit chaos to the forefront. Both PM May and Labor party failed to get their amendments approved resulting in a scenario on no-deal exit as motion to extend article 50 and attempt Brexit referendum as voted down and PM May was given an ultimatum where her Plan B can be put in motion only if she convinces EU to replace Irish backstop with another deal which EU is not ready for. This situation will lead to sharp losses in both economies. Further Sino-U.S. trade deal could also be foiled if Presidents Xi-Jinping and Donald Trump fail to resolve their differences during their meeting. EU is also likely to enter trade talks with the U.S. but current scenario suggests that E.U doesn’t want to open access of their agriculture market to U.S.A which U.S. expects to obtain via threat of sanctions of EU auto market. As multiple events from both local and international market are expected to add layers of bearish pressure on EURO bulls, the EURUSD pair is likely to suffer sharp losses in the month ahead when looking from a fundamental perspective.

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