Here’s a quick rundown of prior week EUR/USD drivers that are likely to continue to drive the pair
ECB Inaction, Fed Stimulus: Bullish for the EUR/USD
Despite considerable deterioration in the EU since the ECB’s last meeting, and Draghi’s dour view on the EU’s growth prospects, the ECB is not making any new easing moves for the moment, although the possibility was left open in case of further deterioration. Meanwhile the Fed, and now Japan, are both engaged in huge stimulus operations. They should inflate asset prices, might help their economies, but are likely to gut the value of their respective currencies, the USD and JPY.
This difference in central bank policy alone should provide some support for the EUR over the coming weeks.
Disappointing U.S. Jobs Reports: Bullish For The EUR/USD
The Fed is believed to want to see 6 months of job growth over 200k. We got that last month. If this month’s NFP report had showed about 200k, as was expected, we’d have been a third of the way there and that alone would have added fuel to the USD rally and knocked the EUR/USD back further.
However this month’s disappointing 88k new jobs sets the counter back to zero and reaffirms the fed’s doubts about the pace and strength of the U.S. recovery, and thus of the dovish policies currently in place.
EU Complacency: Bullish For The EUR/USD
Not surprisingly, the EUR/USD got its biggest bounce higher since February. How much higher is it likely to run? Much depends on continue complacency about the risk of a new bout of EU banking or sovereign debt crisis anxiety. Still, the events in Italy, Cyprus haven’t spooked markets, nor have rumors of a coming bailout for Slovenia. GIIPS bond yields have stopped rising, and Slovenia seems able to at least defer further bond sales for now, in hope of further calming.
The only other source of new headline anxiety could come from Portugal, where a high court struck down part of the nations’ austerity plan and jeopardizes its bailout package. See here for details. Look at the EUR/USD weekly chart below.
EUR/USD WEEKLY CHART JANUARY 2011 – PRESENT
Source: MetaQuotes Software Corp, thesensibleguidetoforex.com
The pair looks set to attempt a run back up into the next near term resistance around $1.3150 area in the near term, which is defined by the 4 phased resistance of:
- The 50 week (red) EMA
The 20 week (yellow) EMA
The 10 week (blue) EMA
The 38.2 fib retracement line (third blue line from the top).
Note also, however, that the pair is in the neutral (middle) area of its double Bollinger bands, which suggests weak momentum and thus no more than subdued moves within its recent trading range.
Likely EUR/USD Drivers For This Week
Here’s a quick look at the few scheduled events that could provide some new catalyst this week.
The calendar is relatively quiet, but here’s what there is.
Start of Q1 2013 Earnings Season: Effect Unknown
Earnings have been guiding lower, which should be bearish for risk appetite and hence for the EUR/USD. However the usual game is to lowball earnings estimates and so engineer a batch of “positive earnings surprises” (that estimates were lowered a few weeks ago is already forgotten) and so markets and risk appetite could just as well rise and support the pair.
Fed Meeting, Speeches
After last Friday’s weak job reports, no changes to the current easing are expected. If anything, we might get hints that further, minor dovish adjustments are possible
U.S. Retail And Inflation Data: Bullish For The Pair
If these are provide material positive surprises (retail sales higher than expected, inflation lower or steady) that could offset at least some of the pessimism generated from Friday’s jobs reports, and feed risk appetite that would in turn support the pair. If retail sales disappoint, that confirms the jobs figures’ dour outlook and the need for ongoing USD- debasing stimulus – also bullish for the pair.
Further Korean Tensions? Unlikely But Bearish if They Come
Further escalations from North Korea could scare markets and thus pressure the pair.
In sum, we don’t see any dramatic moves coming. The pair likely stays well within its recent range, with odds favoring a continuation in the bounce we saw last week. The big caveat is if stocks and other risk assets finally decide to correct a bit. That could should pull the pair lower along with other risk assets.
Longer Term Fundamental Outlook: Bearish For The EUR/USD
Despite the above, longer term fundamental trends remain bearish for the pair.
The Fed is more likely to tighten over the coming year than to make significant new easing measures, especially if the US economy continues its tepid but still positive growth. Meanwhile the EU’s continued deterioration, and likely need for additional bailouts, makes easing and increased money printing more likely, especially if the German elections in September leave a pro-EUR coalition in place.
As always, we remind readers of the importance of diversifying your assets and income stream by currency exposure, just as you do by asset and sector class. This week Japan moved from mere verbal intervention to active Yen debasement, along with the US and Swiss. The U.K. and EU are also likely to head in the direction of further easing over the coming year.
Of course, for those with deposits in GIIPS -CS banks (GIIPS plus Cyprus and Slovenia), or in any other EU country with a shaky banking system, it would be wise to also diversify your deposit confiscation risk and keep as much as possible in deposits outside of these nations. See here or here for information on the best and most updated guide to safer, simpler ways to get that currency diversification.
Disclosure: No positions.
Disclaimer: The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.