EUR rides high as political risk shifts to other side of the Atlantic
The Eurozone is in something of a sweet spot as it is growing and despite Brexit looks reassuringly calm, whilst in the US Donald Trump looks increasingly to be evolving into a lame duck President, which will weigh on USD.
Indeed, EUR/USD has even punched through 1.1000, making highs for 2017 of 1.1211 and could even challenge previous highs above 1.1300 in the coming months if current political and economic trends in the Eurozone and US continue unabated.
For the first time in a long time – political risk seems to have shifted away from Europe to the US.
Trump looks as if he is getting bogged down in investigations and scandals over his alleged involvement with Russia. This could paralyse his administration making it much harder to implement all those turbo-boosting measures for the economy promised to voters. And he doesn’t have much time to start delivering – the mid-term elections are held in November 2018 with the possibility that the Republicans could lose a lot of seats, which would make life even more difficult for the administration.
Over in Europe the situation has calmed considerably. The Dutch and French elections passed without incident with stridently pro-EU leaders in place in those countries and Eurozone integration now looks set to accelerate, particularly with the UK leaving the block as it was always a break on ever closer union.
Austria is now to hold a snap election following disagreements within the coalition government. There is a risk that the anti-EU Freedom party will do well and could get into government. However, the country’s coalition politics should mute its impulses and besides most Austrians appear to favour the EUR and staying in the EU. So for now, this election isn’t spooking the markets.
Meanwhile, GDP growth in the Eurozone appears to be more broadly based ie not just in Germany. How long this favourable climate for the Eurozone will last is hard to say, as economic flaws remain and populist politics are far from dead, but it could be for the rest of the year, which could see the EUR well supported.
TECHNICAL ANALYSIS: EUR/USD looking overbought after strong rally
Following a big pull back in March, EUR/USD regained its poised to stage a strong recovery taking it to a high of 1.1211 on Friday. However, EUR/USD are now looking dangerously overstretched on the technicals with the daily RSI into overbought territory at 72, its highest level in over a year, and the dailies are outside the upper Bollinger band.
This usually signals that a pull-back or period of consolidation is not far off – and very likely to happen this week on EUR/USD. However, this does not necessarily mean the rally is over and if anything, the up-move, which began in December 2016, has featured sharp rallies followed by large dips and there’s good reason to believe that this pattern is still prevailing. If the pair can remain above the 200-day moving average (turquoise line) that should confirm that bullish sentiment is alive.
Support: 1.1164, 1.1101-3, 1.1085 and 1.1076. Resistance: 1.1253, 1.1282, 1.1300 and 1.1327,
By Justin Pugsley, Markets Analyst MahiFX