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EURUSD Looks to Break Out (adapted from equities article)
Why Does This Occur?
In currency trading, it is about winners and losers. When one country is winning–that is, it has a strong economy–their currency should appreciate. When a currency appreciates it makes the exports of that country more expensive abroad, slowing down the export portion of GDP. It also helps to lower the cost of imports and this has a taming effect on inflation.
When a country is experiencing a weak economy, their currency tends to depreciate or get weaker. When a currency depreciates, it makes their exports cheaper abroad, and at the same time increases the cost of imports. This can increase inflation and/or make domestic goods more competitive versus imported goods, helping to boost economic activity.
Central Bank Policy is also an influence on a currency. If a country is easing or likely to keep rates unchanged for an extended period of time, while another country is talking about tightening (or the market perceives they will be tightening), it too can lead to more trending markets with the country who is raising rates (or more likely to raise rates) being the one with the strong currency.
In June, the ECB eased via a number of measures, including lowering interest rates, and announcing a program whereby they will provide cheap money to banks with the hope that they are using those funds to increase lending. The program is known by the acronym, TLTRO for Targeted Long-Term Refinancing Operation.
One would have expected that such a scenario would lead to a weaker EURUSD
What Happened?The EURUSD since the June easing by the ECB has moved up, moved down, moved up again, and is now back down (see chart). The activity is non-trending. There has been no conviction. It might be because of the World Cup. It might be the summer doldrums. It might be less liquidity and risk appetite due to increased regulation.
Since July 1, however, there has been another move lower in the EURUSD. In currency trading on July 16, the low reached 1.3520. The two-month low is 1.3502. The low for the year from back in early February is 1.3476 (not shown in the chart).
The pair which has been non-trending over 2014–and especially over the last two months–is on the verge of breaking out below the recent lows. The technical move is also supported by the fundamentals of a weaker EU economy, and stronger US economy, and a more dovish ECB and more hawking (well, less dovish) US Federal Reserve.
All the ingredients are there for a break to new lows in the EURUSD. The last piece of the puzzle is for the market liquidity to push the price down and through the support at 1.3502 and then the low at 1.3476. If done, I would expect that the EURUSD might look to trend lower over both the near and intermediate term (toward 1.3300 if momentum can be maintained).
Volatility is Turning, Yen Crosses and Equities Ready (based on dailyfx article)
Is there a deeper well of change behind the markets than just this past week's headline-derived swell in volatility? We have seen short-lived panics quickly squashed by opportunistic traders many times over the past months and years, with conditions ultimately returning to complacency and an increasingly stretched reach for return. Yet, rather than focus on the ripple, the underlying current is starting to turn. The pull of a 'return to norm' is exposing investors' leverage to risk and finding different benchmarks for sentiment on divergent paths. What should we watch for and where are the trading opportunities? We discuss this in the weekend Trading Video.
Glenn Stevens’ speech, US housing data, inflation and industrial data, NZ rate decision, British GDP data are the main events on FX calendar this week. Here is an outlook on the main market-movers ahead.
Last week the Philly Fed Index jumped to 23.9 points in July marking the highest reading since March 2011. Current activity rose to 23.9 from 17.8 in June, orders index jumped to 34.2 from 16.8. Economists expected the index to fall to 15.6. This release suggests manufacturing has accelerated across the board in the Philadelphia region heading towards a successful second half –year. More positive news came from the US employment market with a lower than expected release of 302,000 clams, down 3,000 from the prior week, beating expectations for a rise to 310,000. Will the US economy continue its upturn trend?
The NZD/USD pair fell hard during the course of the week, breaking below the 0.87 handle. There is a significant amount of support below though, so we are not necessarily excited about shorting at this point. In fact, we think that the massive amount of support below should come into play, and we would be buyers of a supportive candle, as we see the 0.85 level as the beginning of massive support. On the other hand, if we get above the 0.88 level, we believe that this market that goes to the 0.90 handle.
The EUR/USD pair fell during the course of the week after initially trying to rally. However, we remain above the 1.35 handle, and therefore we feel that the market is still simply going to consolidate in this relatively tight range. Because of that, we don’t necessarily like the idea of being involved in this market from a longer-term perspective, and with this, we are positive, but only for the very short-term. If we break down below the 1.35 level however, this market could go down to the 1.33 level.
The broadly weaker euro fell to its lowest level in five months against the safe haven dollar and Japanese yen on Friday before recovering some of these losses late in the session.
EUR/USD touched lows of 1.3491, the weakest since February 6 before pulling back to 1.3525 late Friday. For the week, the pair was down 0.56%.
The drop in the euro came amid increased demand for safe haven assets following the shooting down of a Malaysia Airlines jet in eastern Ukraine on Thursday.
Moscow has denied involvement in the crash, which came a day after the U.S. announced a fresh round of sanctions against Russia for supporting separatists in east Ukraine.
Markets were also unsettled as Israel expanded its ground offensive in Gaza.
The euro came under additional pressure after the Bank of Italy cut its growth forecast for this year to 0.2% from 0.7% on Friday and warned that risks to the economy remained to the downside. The announcement underlined concerns over the faltering economic recovery in the currency bloc.
Earlier in the week European Central Bank President Mario Draghi said that large scale asset purchases are “squarely” within the bank’s mandate. The remarks were the latest indication that the central bank is open to further monetary easing measures to stave off the risk of deflation in the euro area.
Demand for the dollar continued to be underpinned after Federal Reserve Chair Janet Yellen indicated earlier in the week that interest rates may rise sooner if the economy continues to improve.
Elsewhere, EUR/JPY hit lows of 136.72, the lowest since February 5 and was last at 137.07. The pair lost 0.59% for the week.
In the week ahead, the U.S. is to release what will be closely watched data on consumer prices, home sales and manufacturing orders. Investors will also be awaiting surveys on private sector activity in the euro zone.
Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets. The guide skips Wednesday as there are no relevant events on this day.
Monday, July 21
- In the euro zone, Germany’s Bundesbank is to publish its monthly report.
Tuesday, July 22- The U.S. is to release reports on consumer price inflation and existing home sales.
Thursday, July 24- The euro zone is to publish preliminary data on
manufacturing and service sector activity, while Germany and France are
to publish individual reports on private sector growth.
- Meanwhile, Spain is to release its latest employment report.
- The U.S. is to produce data on unemployment claims, manufacturing activity and new home sales.
Friday, July 25The New Zealand dollar ended Friday’s session close to a four-week low against its U.S. counterpart, amid speculation that the Federal Reserve could hike U.S. interest rates sooner than expected.
NZD/USD hit 0.8648 on Thursday, the pair’s lowest since June 17, before subsequently consolidating at 0.8688 by close of trade on Friday, up 0.24% for the day but 1.45% lower for the week.
The pair is likely to find support at 0.8648, the low from July 17 and resistance at 0.8717, the high from July 17.
Demand for the U.S. dollar continued to be underpinned after Federal Reserve Chair Janet Yellen indicated earlier in the week that interest rates may rise sooner if the economy continues to improve.
Meanwhile, investors reassessed the geopolitical situation in Eastern Europe and in the Middle East.
A Malaysian Airlines passenger jet crashed in eastern Ukraine on Thursday. All 298 people on board were killed, with the U.S. blaming pro-Russian separatists for the act.
Moscow has denied involvement in the crash, which came a day after the U.S. announced a fresh round of sanctions against Russia for supporting separatists in east Ukraine.
Markets were also unsettled as Israel expanded its ground offensive in Gaza against Hamas militants who fired hundreds of rockets into Israel.
Data from the Commodities Futures Trading Commission released Friday showed that speculators increased their bullish bets on the New Zealand dollar in the week ending July 15.
Net longs totaled 15,453 contracts, compared to net longs of 14,416 in the preceding week.
In the week ahead, the U.S. is to release what will be closely watched data on consumer prices, home sales and manufacturing orders, while a rate statement by New Zealand’s central bank will also be in focus.
Ahead of the coming week, Investing.com has compiled a list of these and other significant events likely to affect the markets. The guide skips Monday and Wednesday as there are no relevant events on these days.
Tuesday, July 22
- The U.S. is to release reports on consumer price inflation and existing home sales.
Thursday, July 24- The Reserve Bank of New Zealand is to announce its
benchmark interest rate and publish its rate statement, which outlines
economic conditions and the factors affecting the monetary policy
decision. The central bank is also to hold a press conference to discuss
the monetary policy decision.
- New Zealand is also due to release a report on its trade balance.
- The U.S. is to produce data on unemployment claims, manufacturing activity and new home sales.
Friday, July 25Exchange Rate Forecasts 2015: Euro Dollar Rate (EUR/USD) Gains Lie Ahead
Analysts at BMO Capital have forecast that the euro exchange rate complex will rise in coming months.
The call comes after a soft patch for the euro following the June interest rate cut at the European Central Bank. However, 2014 has for the most part gone the way of the shared currency and trend momentum remains positive longer-term.
According to BMO Capital the ECB will ultimately have to buy fewer assets in ‘QE’ as prices have already risen in advance.
It is a fear of further ECB action that has kept a lid on the shared currency in recent times, should this fear be removed then we could well see the euro rise.
(Note: If you are hoping for a better exchange rate then don't hesitate and don't leave it to chance, ensure your currency provider has the relevant stop-losses in place. Furthermore, by using an independent provider you could be able to execute your currency needs at rates that can be up to 5% more beneficial than the rates offered by your bank.)
Furthermore, low-yields globally will ensure peripheral Eurozone bonds are receivers of funds as traders deploy a ‘buys on dips’ strategy and on a wider cross currency basis this is expected to reduce EUR-negative outflows.
From a trade-weighted perspective the EUR (ex-USD) is believed to be strong, "EURUSD strength not simply due to a weak USD," say analysts.
Germany’s trade surplus with the Euro Area has ceased deteriorating and this should ensure the Balance of Payments book is to remain strong, a boon for those hoping for stronger euro exchange rates.
From here, analysts at BMO see 1.3450-1.3500 as the base in EURUSD and look for the pair to challenge the 1.3700-1.3900 range (3-6m).
Trading the News: U.S. Consumer Price Index (CPI) (based on dailyfx article)
The U.S. Consumer Price Index (CPI) may spur a bullish reaction in the U.S. dollar (bearish EUR/USD) should the report undermine the Fed’s dovish outlook for monetary policy.
What’s Expected:
Why Is This Event Important:
Sticky price growth in the world’s largest economy may heighten the appeal of the greenback as it puts increased pressure on the Federal Reserve to move away from its easing cycle, and the next policy meeting on July 30 may generate an improved outlook for the reserve currency should a growing number of central bank officials show a greater willingness to normalize monetary policy sooner rather than later.
Higher input costs along with the pickup in wage growth may generate another stronger-than-expected inflation print, and an unexpected uptick in the CPI may fuel a near-term rally in the USD as it boosts interest rate expectations.
However, the persist slack in the real economy paired with the slowdown in private sector consumption may drag on price growth, and a weak inflation print may heighten the bearish sentiment surrounding the greenback as it gives the Fed greater scope to retain its highly accommodative policy stance for an extended period of time.
How To Trade This Event Risk
Bullish USD Trade: Headline Reading for Inflation Climbs 2.1% or Greater
- Need to see red, five-minute candle following the release to consider a short trade on EURUSD
- If market reaction favors a long dollar trade, sell EURUSD with two separate position
- Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
- Move stop to entry on remaining position once initial target is hit; set reasonable limit
Bearish USD Trade: U.S. CPI Falls Short of Market Forecast- Need green, five-minute candle to favor a long EURUSD trade
- Implement same setup as the bullish dollar trade, just in the opposite direction
Potential Price Targets For The ReleaseEUR/USD Daily
- Remains at Risk for a Lower-Low as Downward Trending Channel Takes Shape
- Interim Resistance: 1.3650 (78.6% expansion) to 1.3670 (61.8% retracement)
- Interim Support: 1.3490 (50.0% retracement) to 1.3500 Pivot
Impact that the U.S. CPI report has had on EUR/USD during the last release(1 Hour post event )
(End of Day post event)
2014
May 2014 U.S. Consumer Price Index (CPI)
EURUSD M5 : 33 pips price movement by USD - CPI news event
The headline reading for U.S. inflation unexpectedly climbed to an annualized 2.1% in May to mark the fastest pace of growth since October 2011, while the core Consumer Price Index (CPI) advance to 2.0% amid forecasts for 1.9% print. The stronger-than-expected print sparked a bullish reaction in the reserve currency, with the EUR/USD slipping below the 1.3550 region, and the greenback retained the gains throughout the North American session as the pair ended the day at 1.3545.
2014-07-23 14:00 GMT (or 16:00 MQ MT5 time) | [EUR - Consumer Confidence]
if actual > forecast = good for currency (for EUR in our case)
[EUR - Consumer Confidence] = Level of a diffusion index based on surveyed consumers. Financial confidence is a leading indicator of consumer spending, which accounts for a majority of overall economic activity
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Eurozone Consumer Confidence Unexpectedly Falls In July
Euro area consumer confidence deteriorated for a second straight month in July, preliminary data from the European Commission showed Wednesday.
The flash consumer confidence index for Eurozone fell to -8.4 from -7.5 in June. Economists had forecast the score remain unchanged.
The confidence index for the EU declined by 1.2 points to -5.5.
The final figures will be released along with the economic sentiment data on July 30.