As discussed below, both the fundamental and technical picture favors the EURUSD. Nonetheless fundamentals for the coming week could go against the pair. Regarding the technical picture, it remains to be seen whether the current momentum in risk trends as shown by the S&P 500 and other leading indexes is sustainable. Continued QE suggests it is, though a near term consolidation in the EURUSD trend would not surprise anyone.
Drivers of the EURUSD Overwhelmingly Bullish Fundamental Picture
End of US debt ceiling deadlock hurts the USD in multiple ways:
-Increases risk appetite, which favors the EUR, which with its higher yield is more of a risk asset and rises more with risk appetite than the USD.
-USD debasing QE will now continue for a longer period (current consensus is that the taper doesn't begin until the March 19, 2014 meeting) and US benchmark rates are expected to stay lower, due to:
--the economic damage from the shutdown to an already weak US recovery
--the risk of further damage in 2014 from a similar scenario, given the very temporary nature of the recent US debt deal that fails to provide a stable long-term budget and so maintains uncertainty and risk of further self-inflicted economic damage and loss of US fiscal credibility. As we noted here, the US has not even begun to seriously address how it will reduce its growing deficit. Congress continues to fight over the relatively small discretionary portion of its budget. Meanwhile it ignores the real source of America's growing deficit
Appointment of Janet Yellen to Fed leadership also feeds expectations for continued QE (no taper expected until March 19, 2014 Fed meeting) and low US rates as she is seen as the most dovish of the FOMC members. That policy bias, combined with:
-the weak US recovery
-economic damage from the past debt ceiling debate and government shutdown
-continued weak US recovery
ECB holding steady for now, so the Fed continues becoming more dovish relative to the ECB.
Technical Picture: Risk Trend Momentum Favors EURUSD, Though Consolidation Period Likely Near Term
It's the old momentum versus resistance issue whenever risk trends hit new highs. Unless there is strong new fundamental "Viagra" to power a thrust higher, trends tend to spend some time consolidating.
When leading global indexes like the S&P 500, our preferred risk appetite barometer (see here for why), are at historical highs, our technical indicators are limited to a variety of momentum gauges that can only offer clues about the strength of that momentum and thus the likelihood of the current uptrend's continuation barring some unforeseen obstacle.
As of Friday, the overall picture from a variety of momentum indicators is firmly bullish, in all timeframes from 4 hour to one month candle charts. For example, let's look at the daily chart below, which is representative of the other timeframes mentioned above used by traders and investors with planned holding periods well beyond those of the short-term and intraday traders.
EURUSD OUTLOOK: Bullish Fundamental, Technical Picture, But Consolidation This Week?
S&P 500 DAILY CHART JUNE 20 2013 - PRESENT
01 oct 20 1349
To keep the chart from becoming too cluttered, we've omitted the oscillators, which were in line with those shown. We note in particular:
- The index is firmly within the double Bollinger band buy zone, bounded by the uppermost green and orange lines (the upper 1 and 2 standard deviation Bollinger bands). These are our favorite momentum indicator.
- All moving averages are trending higher, most importantly the shorter term 10(dark blue) 20 (yellow) day EMAs, as well as the longer term 50 (red) 100 (light blue) and 200 (violet) day EMAs.
Whenever stocks are hitting all-time highs, the natural expectation is that indexes take some time moving sideways or lower, until fundamentals provide some new "Viagra" to stimulate new buying and justify a bullish further thrust higher.
Now that you've had your dose of Freudian allusions for the month, let's look at the likely key fundamental drivers of market sentiment for the coming week.
Bearish EURUSD Drivers
As noted here, with the S&P 500 and other leading global indexes at or near all-time highs, risk trends are prone to a period of consolidation that could see the EURUSD trend flatten or retrace as well.
Q3 Earnings: Expectations are not high for Q3.
The USD has been hit with a barrage of bad news, yet the EUR has made relatively little headway against it.
US Data Dump, Earnings, Risk Trend Consolidation All Threaten Current EURUSD Uptrend
EUR did not show strength vs. currencies other than the USD despite supportive EUR data last week
Top Coming Week EURUSD Drivers:
US Calendar Catch Up: Includes belated data on US monthly jobs reports, as well as existing and new home sales and durable goods.
Note that the Tuesday release of US jobs reports gives these extra potential to spur volatility in the USD and thus the pair, should the reports provide a material surprise. The normal Friday release limits the follow up. However the absence of the normal sequence of preceding reports that hint at the monthly NFP and unemployment reports' outcomes (ADP NFP, as well as the employment component of the manufacturing and services PMIs) reduces the speculation and volatility leading up to the release of the actual BLS monthly reports.
See here for a full report on the top risk appetite drivers for the coming week.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.