EUR remains vulnerable to sudden sharp sell-offs
Though the EUR has recovered a bit from the Brexit vote on June 23, it remains vulnerable to further sharp sell-offs with elections and referenda due across Europe over the next 12 months.
Those sell-offs could even see it test lows of EUR/USD 1.0470 last seen in March 2015. Nonetheless, the Eurozone does have a couple of things going for it. It has a very active central bank prepared to defend the currency’s integrity at any cost. And, the Eurozone runs a huge current account surplus equivalent to 3.1% of GDP, up from 2.8% last year.
But from there onwards it’s mainly bad news. Simply, put the EUR is constantly subject to existential concerns with a number of prominent economists, rating agencies and even banks openly sounding warnings over the single currency’s survival prospects. Italy’s banks riddled with EUR 360bn of non-performing loans is yet another challenge, on top of the Greek debt crisis. Likely it will somehow be patched up, hopefully before it has the chance to go viral, but it highlights the risk that one day there will be a crisis so big that it will rip the Eurozone apart.
Another huge problem for the Eurozone and the EU itself is politics – its institutions have become focal points for populist anger across the confident. Below are five dates, which could either see the EUR sold off sharply if they go badly for the establishment or rally if they go well:
1a/ Oct 2 - Austria to re-run elections and may see victory for Eurosceptic Nobert Hofer for the largely ceremonial role of President. But should he win he has talked of an EU referendum. Even though Austrians are largely pro-EU – it would be an unwelcome development for the block as it could prompt more referenda in other counties and adds to uncertainty.
1b/ Oct 2 - Hungary holds referendum on accepting an EU immigrants’ quota and is widely expected to reject it. It would undermine the authority and credibility of EU institutions and could embolden other states to defy the EU.
2/ Oct 30 or Nov 6 - Italy holds a constitutional referendum. The now less popular Prime Minister Matteo Renzi has made it about his premiership raising the prospect of losing and triggering an election, which could see Eurosceptic parties get into power and call an EU referendum.
3/ No later than Mar 15, 2015 – The Netherlands holds a general election, which may see a victory for far right Eurosceptic politicians who want an EU referendum.
4/ April / May 2017 – France holds a general election. Amid economic stagnation, migration concerns and frequent terror attacks, the French have grown angry with the establishment and could vote the increasingly popular and the deeply Eurosceptic National Front into power.
5/ Autumn 2017 – Germany holds a general election, possibly in September. It’s likely pro-EU parties will win, but it’s a long way into the future and much could change in the meantime.
On Thursday July 21, the European Central Bank holds a press conference and the markets are expecting some announcements over policy measures to support the Eurozone economy following the Brexit vote. However, ECB may decide to wait for more evidence before acting as the Bank of England did last week when it defied expectations by doing nothing pending further economic developments.
TECHNICAL ANALYSIS: EUR/USD looks poised for more downside action
Bearishness towards EUR/USD has been strong since the UK’s June 23 referendum and decision to leave the EU. Since the strong spike through of the lower Bollinger band, the pair have managed to recover some of their poise.
Nonetheless, the charts suggest that more losses could beckon this week – though much depends on this Thursday’s ECB press conference. If the ECB opts for more stimulus EUR/USD is likely to fall, but if it stands pat then expect it to rise further in the short term. The outlook for the Eurozone economy continues to deteriorate suggesting more stimulus is likely at some point and the Italian banking crisis also weighs on sentiment.
In the meantime, the pair bounced off the middle Bollinger band and the RSI is a neutral looking 42, setting up a good basis for further selling when the right catalysts present themselves.
Support can be seen at 1.0970, 1.0912 and 1.0866, while resistance is pegged around 1.1156, 1.1209 and 1.1259.
By Justin Pugsley, Markets Analyst, MahiFX