Averting a potential Deutsche Bank crisis should support EUR/USD
Last week the US Department of Justice (DoJ) was a catalyst for moving the EUR/USD exchange rate and that could well play out into next week, especially if it is confirmed that Deutsche Bank will attract a lower fine for misdemeanours it committed before the financial crisis.
Good news for Germany’s biggest bank should play well for EUR/USD and see it gradually working its way higher – possibly even to 1.1500 by year end. It’s managing to trend higher despite expectations for a US rate hike, possibly because the European Central Bank’s extreme monetary policy might be seen to be running out of steam, like it’s Japanese counterpart.
The big market mover on Friday were rumours that the DoJ will cut its USD 14bn fine on the bank to USD 5.4bn for selling sub-prime mortgage products to US investors. If that’s confirmed EUR/USD should be able to make more headway and should save the spectre of a bank bailout, possible financial contagion issues and the accompanying political fall-out, which would be another violent shudder to the crisis-prone Eurozone.
And there appears to be a precedent for this. Back in 2012, George Osborne, the then UK finance minister apparently intervened into a US investigation of alleged money laundering by HSBC. It was enough for the bank to escape harsher treatment by the DoJ on the basis that it could have caused a financial disaster. In the end, it was fined GBP 1.2bn in 2012. The same thinking might prevail in Deutsche Bank’s favour.
The other two big features for this week are purchasing managers’ indices or PMIs and lots of them from across Europe and the US, which could move markets if they move too far outside expectations.
The other main event – outside any Deutsche Bank/DoJ news – is of course US Non-Farm Payrolls. September is expected to show that 170,000 jobs were created versus 151,000 for August. If the figure comes out as expected it should be enough to keep alive expectations for a rate hike in December. A strong number in the order of 200,000 could see USD rally quite hard.
Also, on Sunday Oct 9, Presidential hopefuls Hilary Clinton and Donald Trump hold another live debate. Last time Clinton seems to have come out better, the forex markets will be watching closely to see if she can come ahead again.
TECHNICAL ANALYSIS: EUR/USD look poised for break-out as long-term volatility drops
Despite the bouts of volatility induced by the Deutsche Bank / US Department of Justice story, EUR/USD is still edging higher. The prospect of a lower fine from the DoJ, if confirmed, and therefore avoiding the possibility of a bail-out and maybe even contagion issues, would be a big boost for EUR/USD.
But longer-term volatility has actually been declining as shown by the narrowing of the Bollinger bands since late August. On the dailies, oscillators such as MACD and the slow stochastics have been throwing out mixed signals and the RSI is in very neutral territory.
What this is suggesting is that there is a potential build up to a big move with any news about Deutsche Bank and Friday’s Non-Farm Payrolls potentially being catalysts this week. Indeed, if the DoJ sticks to its guns – EUR/USD could quickly plummet as the market is primed for good news on that front.
Support can be seen around 1.1151, 1.1143 and 1.1081 with resistance placed at 1.1260, 1.1279 and 1.1353 should it rally particularly hard.