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The possibility of a third US interest rate rise coming this December and the intended unwinding of the Federal Reserve's $4.2 trillion quantitative easing programme don't appear to have given USD a sustained recovery and when markets don't rally on positive news it is generally a bearish sign.
The US is normalising its monetary policy and doing so ahead of the other major currency areas. Yet for the moment at least this doesn't appear to be enough to turn around the greenback's fortunes and it could be sometime before that happens while positive narratives play-out on the other currencies.
Firstly, there's the disappointment that President Donald Trump's bullish economic agenda has not been implemented due to strife with Congress. However, Trump might be starting to master US politics with signs of a more consensual approach with the raising of the budget ceiling being an early victory for this strategy. It's possible he may now get some of his economic agenda through Congress, such as the tax cuts, and this may in time help revive USD and accelerate the Fed’s normalisation process. But for now markets remain sceptical over the pace of the Fed’s normalisation plans.
Secondly, there's the other currencies. The Eurozone's economy is growing broadly and the European Central Bank is pondering reigning in its ultra-simulative monetary policy. Also, integration is back on the agenda in the Eurozone and without political union it is unlikely the EUR can survive. Whether this can overcome populist pressures over the long-term is another matter. But for now, the EUR has the wind in its sails.
JPY, a safe-haven currency, has been in higher demand recently due to troubles with North Korea. And even GBP is showing a steady recovery against USD with the Bank of England talking about raising UK interest rates. Also, the fact that UK Prime Minister Theresa May is asking for a maximum two-year transition deal should be seen as supportive for GBP as it lowers economic risks and makes that rate rise more likely. Though there's a long way to go before the UK and EU agree to a transition period. There are still some views on both sides of the channel that the divorce should be quick so both sides can move on.
USD could therefore languish quite a bit longer as the other major currencies are enjoying stronger support. But traders should be aware that shorting USD is becoming an increasingly over-crowded trade, suggesting there could be some turbulence ahead even if longer-term trends are not reversed outright.
TECHNICAL ANALYSIS: Waiting for EUR/USD consolidation to play out
With volatility having dissipated and with oscillators in neutral territory, the pair are primed for a break-out. The recent trend of direction, with the pair above the 200-day and 50-day moving average (turquoise blue) suggests it will be on the upside, but much will depend on the catalyst for that move and if it’s bullish or bearish for the EUR. In the meantime, traders will have to wait for the current consolidation pattern to work itself out, however long that takes.
Resistance can be seen at 1.1992, 1.2035, 1.2069 and 1.2091 with support around 1.1893, 1.1874, 1.1839 and 1.1823.
By Justin Pugsley, Markets Analyst MahiFX