Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Profile

As EUR rally reverses populist politics couldAs EUR rally reverses pop once again come into play

The EUR’s rally looks like it may be over, but discerning why that might the case is harder to figure out with so many factors, economic and political, at play.

If the bears maintain the upper hand EUR/USD could soon sink to levels of 1.1400-1.1500 and maybe beyond, which may in part reflect that USD might be in the process of staging a comeback.

Part of the explanation for the EUR’s fall is because of the European Central Bank (ECB) announcing that from January 2018 it will taper its quantitative easing programme to EUR 30bn a month from EUR 60bn for nine months and will continue to reinvest the proceeds of its bond holdings. This reflects much improved economic conditions in the Eurozone and that is actually very positive.

As EUR rally reverses populist politics couldAs EUR rally reverses pop once again come into play

Part of the explanation for the EUR’s fall is because of the European Central Bank (ECB) announcing that from January 2018 it will taper its quantitative easing programme to EUR 30bn a month from EUR 60bn for nine months and will continue to reinvest the proceeds of its bond holdings. This reflects much improved economic conditions in the Eurozone and that is actually very positive.

Clearly, less money creation is bullish for the currency - however, the ECB acted as the markets had anticipated so it could be a case of simply taking profits on the basis of the expected having become fact (and long EUR had become a very over-crowded trade). A similar pattern played out with USD as the US Federal Reserve started hiking interest rates (though the fall also reflected growing disappointment over the failure of President Donald Trump to unleash his massive economic stimulus).

Another explanation is politics, which are looking increasingly volatile across Europe. The populist upsurge looks far from over. The Catalan parliament declared independence and as expected Spain suspended Catalonian autonomy and gone for direct rule. There will now be an election in the region on December 21, which will in a sense be a sort of referendum. If the separatists gain a majority it will plunge Spain deeper into crisis, which will no doubt have a domino effect on the EUR. This column still believes that Catalonia will remain part of Spain and there is likely still majority support for that in the region — though of course, that could change between now and the election.

The other factor is that following elections, Austria and the Czech Republic are seeing the politics of those countries turn more Eurosceptic meaning that it will be harder to maintain discipline n the Eurozone and the EU. Also, Germany’s chancellor Angela Merkel has been weakened following elections and will find it harder to keep the integrationist agenda alive. That basically leaves France as the only big player enthusiastic over ‘ever closer union’ as everyone else has either lost enthusiasm or is too busy dealing with domestic issues, while the UK is leaving the club.

For EUR bulls, Europe’s increasingly nationalist and populist politics should be a real cause for concern as they have the potential to reverse any upward momentum.

 

TECHNICAL ANALYSIS: Bearish pattern for EUR/USD suggests more weakness

From a technical perspective the EUR/USD rally looks like it is over following an almost perfect head and shoulders pattern coming after a rally that started around December 2016. Indeed, the break-down below the head and shoulders pattern (levels of 1.1700) looks decisive and taking out the the 50-day moving average (turquoise blue) is also bearish, though EUR/USD are still far away from the more important 100-day moving average.

But after sharp falls late last week, the pair look near to taking a pause before moving lower again. The daily RSI isn’t quite oversold yet, but the pair are pushing hard into the lower Bollinger band and should find strong support around the 1.1500 level.

Support can be seen around 1.1556, 1.1469, 1.1398 and 1.1345 with resistance at 1.1710, 1.1723, 1,1814.

 

By Justin Pugsley, Markets Analyst, MahiFX

comments powered by Disqus

Trader Stories

Latest Interviews

Statement on CHF market volatility

Business as usual for MahiFX despite Swiss franc movement

Full Interview

MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such. Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. MahiFX’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.