FX markets betting on Dec US rate rise – but ECB could spoil the trend
Last week USD put in a strong performance as expectations for a rate rise are gaining momentum thanks to comments from some Federal Reserve officials and relatively robust US economic data – However, the European Central Bank (ECB) could derail that trend.
ECB President Mario Draghi speaks on Monday and then there’s the ECB press conference on Thursday. It’s possible that on one of those days Draghi will either hint at, or announce an intention to taper the ECB’s quantitative easing (QE) programme.
There are three reasons why markets see this as possible:
1/ The ECB is potentially running out bonds to buy (though with some policy and legal gymnastics it could probably find a way to buy other bonds if it decided to extend its QE programme)
2/ The Eurozone economy has been growing (suggesting less need for stimulus and inflation hit the highest level in two years recently – though is still at modest levels)
3/ There’s politics and in particular Germany’s. QE was never popular in Berlin and there’s a lot of pressure for it to stop as soon as possible.
Any hint from Draghi that at a taper is on the cards is likely to be bullish for the EUR. However, he may want to wait a bit longer before showing his hand i.e. let other events play out such as the US elections and maybe even the Fed’s December meeting.
However, last week it was USD that was in the ascendancy. Various data from sources such as the Commodity Futures Trading Commission suggest that net long positions are building in the USD as traders increasingly believe that the US Federal Reserve will hike interest rates in December. By then the US elections will be out of the way, and on that front it increasingly looks like Hilary Clinton will be the winner, which gives markets some feeling of greater certainty.
Over the last month, the US Dollar index has made steady gains from 95.288 to 98.019 on Friday and represents a recovery from the year-low of 92.626 seen in May. And the current trend favours further progress against EUR and providing the markets aren’t gripped by spasms of fear, then also JPY where support just above the 100.00 level has proved solid.
Other big events on the calendar for this week, which will confirm or dent USD’s ascent include US inflation data on Tuesday, on Wednesday there is a third US Presidential debate. Could embattled contender Donald Trump score a comeback? Immigration will be a topic for discussion, an issue, which chimes with a large part of the US electorate, and one where Trump seems to be strong.
On Thursday it is weekly US unemployment figures. It’s just possible that this week could turn out to be a decisive one for EUR/USD. Over to you Mr Draghi!
TECHNICAL ANALYSIS: EUR/USD poised near crucial support levels
EUR/USD has broken through a consolidation pattern and is now testing key support levels. Unless there are any news catalysts to support it, it could fall through, confirming a downtrend in the process, which could take it all the way down to around 1.0820 in the short to medium term.
On the dailies the pair are currently pushing down hard and have even breached the lower Bollinger band and the RSI is very close to being oversold. This suggests the pair could be close to consolidating if the technicals are left to run their course. Support around the 1.0950-70 area is likely to be quite strong in the absence of any news catalysts to dictate otherwise.
However, if that support area gives away, EUR/USD could melt down to another cluster of support areas above 1.0820.
Support should be seen around 1.0951, 1.0912 and 1.0822-5 and resistance at 1.0995, 1.1008 and 1.1057.
By Justin Pugsley, Market Analyst, MahiFX