Analys från DailyFX
EURUSD Looking Past Taper Speculation at Fed vs. ECB Policy Trends
Talking Points:
- Fed may look to scale back QE at some point in 2014
- ECB likely to continue easing monetary policy in the year ahead
- Will look for technical confirmation to enter short EUR/USD
The markets have been preoccupied with the timeline for the Federal Reserve’s “tapering” of its QE3 asset purchases since the central bank unexpectedly opted to keep the stimulus program at full size in September. While this process is likely to continue feeding short-term volatility, the overall picture is less erratic. On balance, it seems fair to assume the Fed will look to scale back QE at some point in 2014. In relative terms, that represents a hawkish shift along the monetary policy spectrum.
This stands in stark contrast with the trajectory of ECB monetary policy. Eurozone inflation has trended lower for two years, prompting Mario Draghi and company to cut interest rates by 25bps in November after year-on-year CPI slipped to 0.7 percent. This drove the Euro down at first but the single currency quickly erased the drop. This makes sense: cutting the benchmark rate from 50 to 25 basis points means little when the market rate for borrowing Euros (EONIA) has averaged around 8bps this year.
Investors’ inflation expectations priced into bond yields continued to fall after November’s rate cut. Economists agree: a survey of forecasters polled by Bloomberg shows the outlook for 2014 CPI inflation was marked down from 1.5 to 1.3 percent in mid-November, after that month’s ECB meeting. November’s PMI data showed region-wide output prices across the industry spectrum fell for the 20th consecutive month, suggesting calls for lower inflation are rooted in real-economy developments.
All told, this means the ECB is likely to continue easing monetary policy in the year ahead. Non-standard options like negative deposit rates, another round of LTROs or a direct-lending program similar to the BOE’s FLS scheme are possible alternatives. Whichever form said easing takes however, the bottom line remains: the ECB stands to become more dovish while the Fed is positioned to move in the opposite direction, making for a bearish outlook on EUR/USD. I will look for technical confirmation of reversal as prices test channel resistance set from April 2008 to enter short, initially targeting 1.3148 (23.6% Fibonacci expansion level).
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
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EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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