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EUR/USD Forecast Oct. 12-16
EUR/USD moved in range and eventually broke higher above downtrend resistance. Is the road to higher levels open? An important German survey and inflation numbers will set the tone. Here is an outlook for the highlights of this week and an updated technical analysis for EUR/USD.
Euro-zone services PMIs showed another slowdown, along the rest of the world and German trade balance also reflected this downturn. The ECB meeting minutes showed willingness to do more, but no real rush. In the US, the meeting minutes showed the decision not to raise rates was not close, and this eventually enabled the euro to join commodity currencies in beating the US dollar.
* All times are GMT
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EU bank could demand loans back from VW: EIB chief in paper
The European Investment Bank (EIB) will examine whether Volkswagen (DE:VOWG_p) used any loans from the European Union to cheat on emissions tests for diesel vehicles and could demand money back, EIB chief Werner Hoyer told a German newspaper.
"The EIB could have taken a hit (from the emissions scandal) because we have to fulfil certain climate targets with our loans," the Sueddeutsche Zeitung quoted Hoyer as saying in a summary of an article to be published on Monday.
Europe's largest carmaker has admitted cheating in diesel emissions tests in the United States and Germany's transport minister says it also manipulated them in Europe, where VW sells about 40 percent of its vehicles.
The EIB has granted loans worth around 4.6 billion euros ($5.2 billion) to Volkswagen since 1990, among other for the development of engines with lower emissions and manufacturing sites in South America, according to Sueddeutscche Zeitung.
Of that figure, around 1.8 billion euros are still outstanding, the paper said.
The EIB will conduct "very thorough investigations" into what VW used the funds for, Sueddeutsche quoted Hoyer as saying on the sidelines of an International Monetary Fund meeting in Lima, Peru.
If it finds that the funds were used for purposes other than intended, the EU bank will have to "ask ourselves whether we have to demand loans back," he said.
He also said he was "very disappointed" by Volkswagen, adding the EIB's relationship with the carmaker would be greatly damaged by the scandal.
Get Ready For More ECB QE And EUR Subsequent Fall - Goldman Sachs
In a note to clients on Friday, Goldman Sachs discusses why EUR/USD has lagged the recent moves in European rates, including cross-currency basis, outlining its views for the basis of more ECB easing and how that will impact the direction and targets of EUR/USD over the coming months.
"We analyse in more detail the drift lower in EUR cross-currency basis, in particular to understand the relationship to ECB easing. We find that there is a strong link between the expectations of central bank balance sheets and the level of cross-currency basis, and that the recent move lower is consistent with the ECB’s future expanded balance sheet under its QE programme," GS argues.
"It is not only in European basis that there have been falls in recent weeks – the falls have in fact been larger in JPY, and have also occurred in other major currencies vs the USD. The commonality across these markets may point to the USD itself – the anticipation of an eventual Fed tightening cycle may be contributing to the drift lower (and September’s dovish FOMC to the latest bounce).
But beyond the near-term moves, what is driving the drift lower in EUR basis? The clearest candidate is the monetary policy divergence between the US and the Euro area," GS adds.
In particular, GS tests the idea that the relative size of central bank balance sheets can drive movements in the basis, given the substantial shifts in both ECB and Fed balance sheets resulting from unconventional monetary policy in recent years.
"We find that a EUR1trn balance sheet expansion is consistent with a drop in the 2-year cross-currency basis of around 10bp. Moreover, our expectation of an extension to ECB QE in coming months is consistent with potentially even lower levels of EUR cross-currency basis," GS argues.
"An important caveat is the risk from a delay to the Fed rate hike beyond December 2015, which would also signal a delay to Fed balance sheet normalisation, pushing upwards on cross-currency basis. Following the September FOMC minutes, we pushed out our expectation for the ending of reinvestments of the Fed’s security holdings – and thus the shrinking of the Fed’s balance sheet – from late-2016 to mid-2017.
But our base case continues to be further monetary policy divergence between the Fed and the ECB, which in our view will also lead to further falls in EUR/$ towards our 12-month target of 0.95," GS projects.
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EUR/USD: Euro Starts Week on Positive Note
Benefiting from US dollar weakness, the euro edged higher on Monday in what is expected to be a muted session due to minor data on the European schedule and a US bank holiday.
The dovish Federal Reserve (Fed) minutes published on Thursday triggered a fresh USD sell-off, which continued to extend into a third-day on Monday. However, during the weekend both Federal Open Market Committee (FOMC) Vice-Chair William Dudley and Fed Board of Governors Vice-Chair Stanley Fischer reiterated that their forecasts still favor a 2015 normalization, somewhat offsetting US dollar losses.
The euro added 0.15% to $1.1370 on Monday, hovering near its one-month highs.
Since the Fed's decision to keep rates on hold last month, the US economy has provided markets with much weaker data, "it stands to reason that Fed policymakers are much less likely to be keen to tighten policy in the immediate future, irrespective of what they might say publicly, in terms of keeping a 2015 rate rise on the table," Michael Hewson from CMC Markets UK said in a research note on Monday.
The weaker US dollar also prompted a strong rebound in commodity prices last week, which in turn gave a number of mining and energy stocks a long overdue reprieve from the recent downward pressure in their share prices, while it also boosted commodity currencies such as AUD and NZD.
Fed speakers will remain in focus this week as well, with Dennis Lockhart and Charles Evans delivering speeches later in the US session.
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The euro recorded a second consecutive increase against the dollar on Friday. On the last working day of the week the bulls prevailed and took the pair to significantly higher levels. As a result, resistance at 1.1325 was broken. Short-term indicators remain in favor of the single currency, and the breakthrough of the key level at 1.1436 is highly probable. Session on Friday started a price of 1.1274, and the euro added 77 pips. Peak of the day was reached at 1.1386.
On Friday session the EURUSD rallied with a wide range and close in the green near the high of the day.
The pair is broke to the upside the downward triangle suggesting a strong upward trend with a possible target at 1.1460 or even up to 1.1714.
The key levels to watch are 1.1460 (Resistance), the 10-day moving average at 1.1270 (support) and 1.1237 (support).
EURUSd is revolving around 1.1375 level, greenback lost ground with fading rate hike expectations. next level to watch is 1.1444
EUR/USD consolidate around the resistance level 1.1370 a possible rebound can start from this point.
I'm still bullish on this pair!
Inflation in Germany Adds Lines on Draghi's Forehead: Sept CPI
A closely watched measure of German inflation declined on a monthly basis in September, the final CPI reading from the German Federal Statistical Office (Destatis) said on Tuesday.
Consumer prices shrank 0.2% month-on-month in the ninth month of the year. Back in August, the gauge had remained flat on the same basis.
In annual terms, the cost of living in the euro area's number one economy was flat in September, the final print showed, compared to 0.2% in August.
The readings are well below the European Central Bank's (ECB) inflation target of just below 2%.
"The low inflation rate in September 2015 was due mainly to the decrease in energy prices (–9.3% on September 2014). Compared with the last few months, the decrease of energy prices accelerated again. In September 2015 the price development for mineral oil products (–17.1%, of which heating oil: –27.9%; motor fuels: –13.8%) again had a marked downward effect on the overall inflation rate. The prices of all other energy products, too, were below the level of a year earlier (for example, charges for central and district heating: –7.4%; gas: –1.8%). Excluding energy prices, the inflation rate in September 2015 would have been markedly higher (+1.1%)," Destatis said in a press release.
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