EUR/USD Fundamental Analysis – week of December 5, 2016

EURUSD managed to hold its low just above 1.0550 and has finally managed to have a decent weekly bounce. The euro had been battered over the last few weeks as the dollar strength dominated the markets but we had been mentioning in our forecasts that the region between 1.0500 and 1.0600 is likely to have a lot of buyers and with some banks and funds reversing their calls and looking for a decent bounce, thats exactly what we got last week. We suspect that the bounce is not finished as yet and may carry to as high as 1.0800 in due course.

The most important news of last week was the NFP report which came in strong though the report from the previous month was adjusted to a lower figure. This would have normally led to a strengthening of the dollar as this not only confirms the rate hike when the Fed meets in the middle of this month but it also increases the chances of further hikes in 2017. But we did not see any dollar strength as the average hourly wages dropped to -0.1% against the expected increase of 0.2%. In other words, there is not much meaning in adding hundreds of thousands of jobs if most of them are going to pay only $10 an hour. What is needed is more jobs and also higher wages and we did not get this in the last month and this disappointed the dollar bulls and helped the EURUSD pair to remain buoyant.

Looking ahead to the coming week, we have the Italians voting on constitutional amendments and if the people vote for a No, then it is likely that the sitting PM has to resign and this is a risk to the markets and may not be viewed kindly. We also have the bid rate and the ECB Press Conference on Thursday where the market expects the ECB to inform the markets about the timeline for the QE. There have been conflicting reports on whether the ECB will continue the QE beyond March and the markets would hope that it would become clear in the coming week. Any proposal for continuation beyond March without tapering is likely to weaken the euro.