The Eurozone could do more to propel a USD rally than Trump even
The USD index made a 13-year high and looks to be breaking-out of a near two-year consolidation pattern, which could be very bullish with the Eurozone potentially providing real fuel for that rally.
The USD is being powered ahead on assumptions that a Trump presidency will be pro-growth and inflationary. The US Federal Reserve pretty much confirmed that the promised December interest rate rise is now looking even more certain.
For now, the USD rally has legs and it could run right up to the inauguration of Donald Trump as President on January 20. Trump wants more pro-growth policies, but he will need to convince Congress who could water them down over inflationary concerns and a ballooning national debt. That could take some of the wind out of USD’s sails.
However, his fiscal policies do answer to calls from many economists who now believe that central bank monetary activism has run out of road. The two places where this looks most true is in the Eurozone and Japan, rather than the US, which has decent growth and low unemployment (though the labour participating rate is low & could be masking real joblessness).
The real challenge for the US is not faster economic growth, but to better distribute it across society. Infrastructure spending could help, particularly if it creates jobs for unemployed and under-employed Americans who once had well paid work in factories and mines.
However, USD exchange rates are not just driven by US events. A string of elections across the Eurozone could have an even bigger impact on forex markets than a Trump presidency.
On Dec 4, there’s an Italian referendum on constitutional reform, which could see prime minister Matteo Renzi stepping down if he loses – a strong possibility. This would trigger elections, which could usher in more Eurosceptic parties. On the same day, the Austrians vote for a President, a largely ceremonial role, but if anti-immigrant politician Norbert Hofer wins it could create a sense of pending crisis in the Eurozone, particularly over elections elsewhere.
On Mar 15, there’s a Dutch election and if Geert Wilders, an anti-immigrant anti-EU politician, wins then that would send a shudder through the Eurozone unleashing a crisis as the Netherlands is a Eurozone member.
On April 23 & May 7, there’s French elections where another populist politician stands a chance of victory. If Marine Le Pen wins and pulled France out of the Eurozone it would be finished. German elections take place around Aug 27-Oct 22 and though unlikely to propel a populist into power it could hobble the establishment parties.
It’s quite easy to see a case for a USD rally next year particularly if the US pursues pro-growth policies while the Eurozone slides into a political chaos if a populist won one of the above elections causing a stampede out of the EUR. This would even overwhelm a possible tapering of the European Central Bank’s quantitative easing programme next year. Its President Mario Draghi speaks on Monday afternoon and he may shed some clues on monetary policy.
Meanwhile, it’s hard to see Donald Trump with his protectionist instincts welcoming a soaring USD – it would likely become a big source of international friction with the Eurozone, China and Japan.
TECHNICAL ANALYSIS: EUR/USD: respite likely soon as looking very over-sold
After a bad week for EUR/USD, the losses seem likely to continue, though a pull-back or short-term consolidation is likely this week, potentially setting up the impetus for the next downward move. A speech from Mario Draghi president of the European Central Bank on Monday could push the pair either way and is a potential news catalyst.
Support levels can be seen at 1.0569 with 1.0519 and 1.0455 is likely to play a pivotal role – if breached that would be very bearish. Getting below 1.0455 would open up the prospect of a move all the way to parity with the USD. However, support just above parity has historically proved to be very solid.
However, in the short-term EUR/USD is looking very oversold. On the dailies, it’s digging deep into the lower Bollinger band and the RSI is well into oversold territory at 22, suggesting that a rebound or consolidation is near to happening.
Resistance levels can be seen around 1.0690 and 1.0736. Any move above 1.0800 might suggest that the EUR/USD bear market has run its course for the time being.