EUR/USD: Convergence may take precedence over divergence this week
Over the last few weeks the monetary policy divergence theme between the USD and the EUR, and to an extent some of the emerging market currencies, actually converged back a little and next week that theme could continue to play out.
The main reason is that there aren’t any big central bank events for the major currencies pencilled for next week other than some speeches. Therefore, USD could continue to lose strength.
Setting the tone of that ‘convergence’ was the US Federal Reserve notching back expectations of four more rates rises this year to just two and if the present growth cycle is nearing its end – that might mean no more rate rises this year. In effect, the Fed has been moving towards market expectations for one or two rate rises this year and this has been reflected in the gradual firming of EUR/USD since December 2015.
Meanwhile, the European Central Bank has been pushing down harder on the monetary accelerator, but it might be brushing up against the limits of what it can do. There are serious concerns that negative interest rates may do more harm than good, particularly for the banking system, and even quantitative easing appears to be becoming less effective. Though that may not stop the ECB trying, following the increasingly desperate actions of the Bank of Japan.
Besides, if commodity prices really are levelling out, then that should soon be reflected in consumer prices numbers, meaning they’re less likely to flirt with deflation. The flip side to that, particularly for the Eurozone, is that there will no longer be growth stimulus from falling commodity prices.
In terms of the big numbers for this week, German IFO business climate and ZEW Economic Sentiment are due on Tuesday March 22 and will be closely watched. The former has been slipping for three consecutive months now reflecting tougher export conditions for German businesses. The later reading has also been pointing downwards recently. Any sign of a reversal on those trends would be supportive for EUR/USD.
On Wednesday, US crude oil inventories are released and have been rising reflecting the oil glut. On Thursday, it’s weekly US unemployment claims, which are likely to reflect a strong jobs market. And on Friday sees the release of US GDP data and traders will want to see if the economy is overcoming recent headwinds such as inventory build ups and slower retail sales. In Q4 2015 for example, it was only 1% (annualised-basis), compared with 2% in Q3.
Some forecasts have been pegged at around 1.9-2.0% for Q1, 2016. Improving numbers would weight on EUR/USD as it would imply Fed tightening is still on the agenda for June. Indeed, any suggestion that slower US growth is little more than a passing phase, and that it is once again strengthening, will place divergence firmly back on the agenda and will see EUR/USD sagging.
TECHNICAL ANALYSIS: EUR/USD nears important resistance level – can it be cleared?
This week could be a test of EUR/USD strength. At least for EUR bulls there should be little from central banks to interrupt progress – though some items such as German confidence indices and US data towards the end of the week could be disruptive.
EUR/USD is now nearing an important resistance level of 1.1376 – a number last seen in October 2015. If that level is successfully challenged, the next one to come into focus is around 1.1398 and 1.1475.
Though next week could see further gains for EUR/USD, there’s also a strong possibility for consolidation and that may have already started late last week. Also, if 1.1376 is challenged, but holds, it does suggest the possibility of a double top, which would be negative for EUR/USD.
But in a consolidation scenario, support should kick in around 1.1226, 1.1180 and 1.1144.
Meanwhile, the 50-day and 200-day moving averages could be coming close to generating a buy signal, though EUR/USD would have to make further gains for that to happen. Also, daily RSI is getting very close to over-bought, which often signals a period of pause and overall that’s what the technicals seem to be suggesting for this week – an outlook which can easily be undone by events.
By Justin Pugsley, Markets Analyst, MahiFX