EUR/USD Monthly Forecast – November 2018

The Pairs medium to long term outlook remains in favor of US greenback owing to multiple rate hikes proposed by US Fed but in short term, the price action may go either way owing to volatility influenced by inflation data on both sides of Atlantic and proceedings of geo-political events.
Colin First

The EURUSD pair has been in a range bound price action for last two months. When looking at the candle chart in daily time frame, price action in September and November has formed an “M” pattern.  As of now the pair has lost all gains made over the last two months and the price action for the month of October shows two distinctive phases of price action. The first phase saw EURO gain momentum while the second phase saw price take a steep bearish nose dive. One of the major factors that had influenced the price action across the month for the common currency was Italian budget crisis. Another factor that affected the price action of common currency to great extent was the rout in equity markets.  The first three days of the October saw EURO continue in last month’s bearish momentum but the last two days saw EURO bulls get into some action as Italian budget fears receded while strong German factory data influenced positive investor sentiment and US NFP data was a disappointment which helped EURO maintain positive price action as trading session closed for the week.

Disappointing US Macro Data & Moody’s Rating Upgrade for Italy Helped Euro Maintain Upper Hand in Early Half of October

The second week started on muted note over escalating of spread difference between Italian and German bond yield but the price action saw steady upward move across the week. The common currency began gaining upper hand as risk sentiment returned to market despite ongoing geo-political trade and economic affairs. USD saw further downward move owing to comments from US Treasury Secretary Steven Mnuchin which reignited trade war woes and a rise in US Treasury yields added to dovish pressure on US Greenback.  The pair closed for the week on positive note as EURO climbed above 1.16 handle on news of US CPI data missing expectations which provided the common currency with a bullish boost.  The third week saw trading session open in favor or EURO bulls as dollar was pressured due to increasing concern that the current account deficit of the US has been negative for long and this is expected to continue to be so over the medium term. However Italian budget crisis came back into investor focus and spread continued to widen between Italian and German bonds resulting in EURO turning dovish and this momentum carried forward through rest of the month.

Majority of third week was steep downward move for common currency which was triggered by news of Italy’s expansionary fiscal policy approved by Italian government, under which the budget deficit is set to widen to 2.4% of the gross domestic product, in defiance of EU rules that require a shrinking deficit and resulted in the spread between Italy and German 10-year government bond yields rising to five-year highs above 300 basis points resulting in EURO facing tremendous bearish pressure. This resulted in EURO falling below 1.16 handle and moving in range bound fashion in 1.15 price levels. EURO faced additional bearish pressure owing to disappointing bearish macro (inflation) data from Germany & Euro zone resulting in pair moving towards lower half of 1.15 price levels and testing 1.14 handle.  The pair fell below 1.14 handle post FOMC update in later half of week as result of highly hawkish FOMC update in which forward guidance indicated multiple rate hikes during 2019 changing the long time support of 1.15 handle into a new resistance for the common currency.

Inflation Data From Both Sides Of Atlantic & Proceedings of Geo-Political Events To Dictate Price Momentum in Early Half of November

The last two weeks of October have been highly bearish for the common currency with the pair seeing steady downwards price action with the pair losing nearly 2.09% in over eight consecutive session of decline in exchange rate. The fourth week started on positive note for EURO as news of Moody’s credit rating update for Italy and possible deal between EU and Italy helped the common currency stay afloat. But the pair lost ground and continued the decline as market proceedings of Italian budget resulted in spread widening and Equity markets taking a dovish tone across globe dented Euro’s momentum in broad market. Investors took to a risk off sentiment and remained on cautious tone ahead of ECB’s monetary policy meet update. ECB’s update was within analysts and investors expectations which combined with increased in demand for USD amid risk off sentiment across globe resulting in steady decline for EURO. The pair continued to trade bearish in last week of October as the week opened with common currency facing pressure owing to German political climate which saw Chancellor Merkel win election by hair’s breadth resulting in tensions rising between coalition parties, news of Merkel stepping down as German Chancellor gave Euro’s some breathing space. However Euro continued to decline as macro data for key markets across Europe and Euro zone data were both bearish resulting in pair testing two month lows. Moving forward the pair is going to see high level of activity during first two weeks of November with Manufacturing PMI, NFP data , inflation data and Fed interest rate updates from US markets and Inflation data, Markit & Service PMI data from Eurozone keeping investors busy. Meanwhile Geo-Political events such as Sino-U.S. trade war escalation, US Sanctions on Iranian Crude oil and Italian budget crisis could put a dent on Euro’s momentum. Regardless of what event transpires the EURUSD pair is set to see high level of volatility during early days of November 2018.

 

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