Euro rally takes a knock, but may only be temporary
Not unsurprisingly the European Central Bank (ECB) played a big part in reversing EUR/USD’s recent rally – but with US and Eurozone fundamentals largely unchanged there is still some chance it could revive.
Having hit a high of EUR/USD 1.1905 in early August – the pair now look on track to test key support levels around 1.1500-1.1600 as traders still seem to be in the process of unwinding EUR longs after having been the most bullish since January 2013 and are covering USD shorts. This trend probably has further to run.
However, the fundamentals remain largely unchanged from two to three weeks ago. The Eurozone is currently in better shape politically and economically than it has been in years, which shifts the market’s focus away from some of its core problems involving the effects of clubbing together incompatible economies under a single currency.
What has changed is the ECB’s tone. It is concerned that a stronger EUR will create deflationary pressures, but for as long as it keeps pumping in cash through its quantitative easing programme it is also potentially stoking future inflationary forces, particularly with strong GDP growth in some member states. However, it has put markets on notice that it does not want a stronger EUR, not that central banks always get their way on such matters – just ask the Bank of Japan.
Meanwhile over in the US – it seems to be going from bad to worse for President Donald Trump.
His mishandled reaction to violence in Charlottesville seems to be making the Trump brand so toxic that key business leaders now no longer want to be associated with it, which is a big blow for a leader who promised to bring a ‘can do’ entrepreneurial spirit to the ‘dead hand’ of government.
Then there’s the swift exit of Steve Bannon, the White House chief strategist, and in many ways a ‘spiritual’ inspiration behind the Trump movement.
All in all, it implies that Trump’s agenda for boosting the economy and reforming the tax system is going to get increasingly bogged down in a political quagmire. And this comes on top of the deepening investigation into his links with Russia, which has the potential to throw up some damaging revelations for the President. This means there’s less pressure on the Federal Reserve to raise interest rates quickly and reduces the bullish case for the USD.
Another factor are negotiations over raising the debt ceiling with the possibility that the US government could start going into shut-down if it is not raised by October. Against this potentially negative political backdrop – the US economy is nonetheless chugging along at around 2% with unemployment continuing to fall.
TECHNICAL ANALYSIS: EUR/USD: Looks like a temporary pull-back
In the end EUR/USD never got a stab at 1.2000 and got no higher than 1.1905. However, the longer-term rally that got started around December 2016 is probably not over yet, there were none of the often-violent characteristics of a major reversal. Indeed, the pull-back has been relatively mild, which has been a feature of this rally.
There’s a chance that EUR/USD may bottom out within the next few weeks and then either consolidate for a while before potentially resuming its rally. Also, the pair are still well above the 200-day moving average (turquoise blue line) and the RSI is well and truly out of over-bought territory now at 57.
Support is at 1.1722, 1.1690, 1.1679 and 1.1631 with resistance levels seen around 1.1780, 1.1871 and 1.1905
By Justin Pugsley, Markets Analyst, MahiFX