EUR likely to notch up further losses as monetary divergence confirmed
The EUR is likely to notch up further losses with the markets seeing monetary divergence as alive and well between the US and the Eurozone and much of the rest of the world.
Falls to as low as EUR/USD 1.0500 are now entirely possible if the ECB and US Federal Reserve stick to their respective playbooks.
Indeed, from the markets’ point of view – Mario Draghi, the head of the European Central Bank (ECB) confirmed the divergence argument. He denied there were any plans to taper its €80bn a month quantitative easing programme after it runs out in March 2017.
If anything, many market participants are anticipating a six-month extension. He did say that it would not be ended abruptly – and indication that the ECB is thinking of tapering it at some point or just a reassurance to the market that there would be no sudden changes in monetary policy?
Markets may have to wait until December to find out what the ECB is planning. If it is to continue, it will have to widen its scope of asset purchases and manage increasingly hostile German political opinion. Meanwhile, the US Federal Reserve seems dead set on raising interest rates at its December meeting.
However, for the Eurozone monetary policy isn’t the only consideration. The crisis prone currency zone has several potential flash points. The Greek crisis is still simmering away in the background, problems could emerge in Portugal and there always seems to be potential for a bank to run into trouble, which ironically is made worse by the ECB’s monetary policy.
And of course, there’s the build up to elections across the Eurozone over 2017 – any one of which could throw a surprise, if not destabilising, result.
These are all factors, which could weigh on the EUR for some time, especially if the US does raise interest rates and indicates that a couple of more hikes are planned over 2017.
Fortunately, the Eurozone is seeing some broad based economic growth, even in some of the peripheral countries, such as Spain. For as long as it continues it will help alleviate some of the stresses, which seem to constantly threaten to rip the Eurozone apart.
TECHNICAL ANALYSIS: EUR/USD looks set to tread lower
EUR/USD continues to work its way lower cheered on by the European Central Bank, which last week let the markets conclude that its monetary largess is set to continue a while longer beyond its March 2017 expiry date.
But in the short-term a pull back or consolidation looks to be close at hand and will likely be another opportunity to position short trades against the EUR. That opportunity could come this week or next.
The pair continue to push down hard on the lower Bollinger bands and the daily RSI is now in oversold territory. Usually that combination following a sustained move usually leads to a pull back or consolidation.
Support levels are 1.0859, 1.0825 and 1.0820 with 1.0789 likely to be a short-term target for the bears. If the monetary divergence is accentuated a move all the way down to around 1.0500 is likely. Beyond that support tends to be very strong. Resistance levels can be seen at 1.0929, 1.0964 and 1.1054.