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Summary

  • Technical Outlook: Neutral in the near term, bearish in the medium term.
  • Fundamental Outlook: Neutral as the Fed and ECB are keeping policies and thus rates steady. Why EUR data gains some importance.
  • Why the pair’s prime drivers become overall risk appetite... and oil prices?
  • Conclusion: Tight trading range this week, to drift with overall risk appetite. See below for why, and what could alter that conclusion.

FX Traders' weekly EURUSD fundamental & technical picture, this week's market drivers that could change it- the bullish, the bearish and likely EURUSD direction.

The following is a partial summary of the conclusions from the fxempire.com weekly analysts' meeting in which we cover outlooks for the major pairs for the coming week and beyond.

Technical picture is neutral in the near term per the daily EURUSD chart, bearish in the medium term per the weekly chart.

Fundamental outlook is neutral given that both central banks, the Fed and ECB, are keeping policy steady in the coming months. EUR data gains some importance because it might influence the pace and timing of future ECB easing and the odds of when a QE program could come. When we discuss what could move the pair, we mean move it within a relatively tight range of 1.35-1.37 given that central bank policies are static and are keeping the gap between USD and EUR rates static. Like stocks, the EURUSD is in low volatility mode.

In the near term then, the pair is range bound within 1.35-1.37, and likely to drift with overall risk appetite given that EU and US rates remain static.

Technical Outlook

First we look at overall risk appetite as portrayed by our sample of global indexes, because the EURUSD has been tracking these fairly well recently.

Overall Risk Appetite Per Weekly Charts Of Leading Global Stock Indexes

(click to enlarge)

Weekly Charts Of Large Cap Global Indexes March 2013 To Present With 10 Week/200 Day EMA In Red: LEFT COLUMN TOP TO BOTTOM: S&P 500, DJ 30, FTSE 100, MIDDLE: CAC 40, DJ EUR 50, DAX 30, RIGHT: HANG SENG, MSCI TAIWAN, NIKKEI 225

Key For S&P 500, DJ EUR 50, Nikkei 225 Weekly Chart: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange.

Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

01 Jun. 21 22.24

Key Take-Aways Weekly Chart: Risk Trends Remain Supportive of the EURUSD

Our sample of weekly charts for leading global stock indexes continue trending higher, suggesting that overall risk appetite remains supportive for the pair, which still tends to move with the indexes.

The reason for that positive correlation between EURUSD and stocks used to be that EUR's interest rate advantage over the USD, as risk appetite encouraged carry traders to buy Euros or Euro denominated instruments, and sell dollars to fund those purchases. However currency markets are forward-looking, and understand that the latest ECB easing and likelihood of more to come means this edge is dying, albeit slowly thanks to Fed dovishness. Instead, the EUR's positive correlation with stocks is more due to the demand for Euros created by the somewhat higher yielding/growth potential stocks and bonds from the EU's periphery nations.

The most important point to note is that last week's pullback was just a technical correction for virtually our entire sample of leading global indexes. For reasons given in last week's market preview there was little reason to suspect it would be more than that. Indeed, with the exception of the UK's FTSE 100, our US and European indexes are essentially right back where they were 2 weeks ago.

See our weekly preview on the lessons and likely top market movers for the coming week for details on this week's likely direction for risk appetite.

EURUSD Weekly Technical Outlook: Medium Term Bearish, Short Term Neutral

Technical Outlook Conclusions:

· Medium Term Bearish As Technical Evidence Per Weekly Chart Favors More Downside

· Short Term Neutral As Technical Evidence Per Daily Chart Suggests 1.365 - 1.355 Trading Range, With Friday's Close Right In The Middle.

(click to enlarge)

EURUSD Weekly Chart 6 May 2012 To Present

KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange. Green downtrend line from EURUSD peak of July 2008 to present, green uptrend line from August 2012 to present. White Fibonacci retracement lines for downtrend of August 2008 To June 2010, yellow Fibonacci retracement lines for downtrend of May 2011 To July 2011.

Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

03 Jun. 21 22.59

Key Take-Aways Weekly Chart:

No Breakout below 1.35 Yet, Trading Range Holds With Support At 1.36

The EURUSD's mild bounce off of the 1.35 area and close in the 1.36 zone keeps the pair within its 19 week trading range, though it's just barely holding on to the lowest end of that range.

The 1.36 zone has held just barely as support. In addition to its being a psychologically important round number, this area has the additional support of the 50 week EMA, the long term 38.2% Fibonacci level, and the medium term 50% Fib level.

The 1.365 zone has become the next resistance zone. In addition to its being a psychologically important round number, it is buttressed by:

--The uptrend line dating all the way back to July 2012. It served as strong support, surviving repeated tests, until it was breached 2 weeks ago in the wake of the ECB's new stimulus plan and coming lower benchmark rates.

--The upper band of the double Bollinger band® sell zone. Bollinger bands can serve as reliable support and resistance in flat or weakly trending markets.

--The 10 and 20 week EMAs, which lurk just above that uptrend line.

Note that the 20 week EMA is equal to the 200 day EMA, which carries special significance for medium and long term traders. There are those who use it as a key guide, staying long in assets above it and short assets below it.

Odds Favor More Downside And Break Below 1.35 That May Signal A Topping

The technical evidence suggests more downside. That's a big deal, because a confirmed break below 1.35 strongly suggests the EURUSD's uptrend that began in July 2012 will be officially over. The evidence for more downside ahead includes:

--As long as price remains in the double Bollinger® band sell zone, that fact alone is potent evidence of that medium term downward momentum is strong enough to put the odds in favor of further downside and justify new short positions, as we discuss here.

--Both the 10 and 20 week EMAs are now clearly trending lower and the faster 10 week EMA has crossed below the slower moving 20 week EMA, which indicates accelerating downward momentum and will be a bearish signal for many traders, both human and algorithmic.

--As noted on the weekly chart, the EURUSD's most recent dips below the uptrend line dating from July 2012, which were also declines into the double Bollinger® band sell zone (May and July of 2013), were unconfirmed breaches of the uptrend line due to their brevity, which was limited to under two weeks, with just one weekly close below the uptrend line. This second straight weekly close below both the uptrend line and double Bollinger® band neutral zone is a first for the pair's medium term uptrend, and many traders could take this second weekly close below the uptrend line to be a confirmed breach that transforms that line from support to resistance. Some will wait for a third weekly close.

--The EURUSD's weekly close creates another "lower high" and further entrenches the 7 week downtrend shown in violet.

Overhead resistance in the 1.365 area is much stronger than support around 1.35. Other than the round 1.35 figure itself, and the lower double Bollinger® band, the next support area of note is around 1.3450 - 1.3520 area due to the presence of the 100 and 200 week EMAs.

EURUSD Daily Technical Outlook: Neutral As EURUSD Stuck In Middle Of Trading Range

(click to enlarge)

EURUSD Daily Chart 18 April 2014 To Present

KEY: 10 Day EMA Dark Blue, 20 Day EMA Yellow, 50 Day EMA Red, 100 Day EMA Light Blue, 200 Day EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange. Green downtrend line from EURUSD peak of July 2008 to present, green uptrend line from August 2012 to present. White Fibonacci retracement lines for downtrend of August 2008 To June 2010, yellow Fibonacci retracement lines for downtrend of May 2011 To July 2011.

Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

04 Jun. 21 23.13

Key Take-Aways Daily Chart: Evidence Favors A Narrow Trading Range Between 1.365 - 1.355

Obviously the downward momentum on the weekly chart will be more pronounced on the daily chart.

That said, while the weekly charts put the odds in favor of more downside in the coming weeks, the near term direction of the pair for the coming days per the daily charts is more mixed, meaning that we could easily stay within the past week's trading range for much of the coming week if news events continue to have minimal influence on the pair, for reasons discussed below in the section on the pair's fundamental outlook.

Resistance of both the long term EURUSD downtrend line (dating back to July of 2008) around 1.36, and uptrend line (dating back to July 2012) held firm Thursday and Friday. Support at 1.35 survived even more tests (6) in recent weeks. Indeed, the pair's drift higher this week set 1.35 as strong short term support.

The pair's close within its double Bollinger® band neutral zone (no meaningful trend on a daily basis) further supports the argument that the pair is likely to drift in the days ahead.

The fact that the pair closed smack in the middle of its recent trading range of 1.365 - 1.355 supports the notion that the pair is likely to drift within this range barring some profound surprise.

Fundamental Outlook: Key Lessons, "Market Movers"

Fed Rate Statement, Economic Projections Press Conference: The Big News Is… No News

For all that was written about the potentially market moving Fed comments from Wednesday, there are only a few points of relevance for EURUSD traders.

The big news out of the Fed this week is that there is no big news. While many have pointed at evidence of rising inflation and how it might pressure the Fed to tighten sooner than expected, Yellen dismissed recent inflation data as "noisy," that is, too short term to influence policy. Evidence of improved labor markets were also countered with expressions of concern that there was still much progress needed.

As we've said repeatedly, the Fed is not changing policy based on any monthly readings. Instead it wants big convincing trends, which aren't coming soon as long as "slow but steady" characterizes the US economic recovery according to the Fed.

In sum:

· Fed policy remains on autopilot for the coming months at lease barring a dramatic change in US growth or inflation.

· The FOMC under Yellen is the same as it was under Bernanke, dovish and far more concerned about tightening too early than too late.

· Although Yellen acknowledged the improvements in the economy, and noted that the Fed is discussing tools for normalizing monetary policy, she said that there would be a considerable period of time between the end of QE to the first rate hike, and when pressed to be more specific about that "considerable time" interval, refused to provide any details, saying only that there is no formula for it. That sounds more like "I really don't know" than "I'm not telling."

Stocks and the EURUSD both jumped higher Wednesday, as investors saw any chance of earlier tightening disappear for now. The majority of FOMC members continue to believe the first hike is coming at some point in 2015. However given the EURUSD's bounce, it's clear that investors are thinking the first rate increase comes later 2015 rather than early or mid-2015, and even then, it will likely be minimal.

The IMF's cutting its US growth forecasts for the coming years, and warning the US to keep rates low (as if the Fed needed any such warning) further reinforced this impression.

US, EU Data Losing Near Term Relevance

As price action of recent weeks demonstrates, recent data hasn't been very influential because it hasn't changed perceptions about the pair.

Both Fed And ECB Policy On Auto-Pilot For Now: As noted above, the Fed's holding steady for the foreseeable future. Meanwhile, although the ECB has pledged to add stimulus if needed, no one expects it to do so until it's had at least 3 months to see how the recent stimulus plan is working.

Therefore when we talk about potential market moving reports, it's looking increasingly likely that "market moving" is becoming a relative term for the EURUSD. In the coming weeks, take "market moving" to refer to how an event will move the EURUSD within the current trading range of ~1.35-1.37.

This narrow band makes the current EURUSD market unappealing to long term traders, but acceptable for those trading off of daily or shorter duration charts, with short planned holding periods measured in days at most, rather than weeks.

To Watch

So with relative interest rates not expected to vary much, the pair is left to drift mostly with overall risk appetite - meaning we go back to watching the above leading US and EU indexes, particularly the S&P 500.

Ok, having just minimized the economic calendar for the coming weeks, here are the events mostly likely to move the pair within that 1.35-1.37 range.

Top Calendar Events To Watch US

The top US events to watch include existing and new home sales (Monday and Tuesday), consumer confidence (Tuesday), revisions to Q1 GDP and durable goods on Wednesday, personal income, personal spending and revisions to the University of Michigan consumer sentiment survey later in the week. The majority are expected to show minor improvements.

Final Q1 GDP on Wednesday, however, should be revised significantly lower, especially after the Fed, IMF, Goldman Sachs, and everyone else, including Bubba (my German Shepherd) have all cut their forecasts.

For those who choose to ignore Janet Yellin's dismissal of climbing inflation data as just so much noise, the core PCE price index report Thursday would be worth watching, because it's believed to be a favorite Fed metric.

EU

The top EU events to watch include the batch of flash manufacturing and services PMIs on Monday, the German Ifo sentiment survey Tuesday, German preliminary CPI on Friday.

As long as the stocks and bonds of the EU's periphery continue to see demand, the EUR's prime fundamental support remains in place, so watch the related indexes and bond sales.

Italian and Spanish yields have moved still lower in recent weeks, as investors seek yield and apparently believe the ECB alone can offer a credible, implicit backstop as more or less eliminating credit risk. Certainly the EU's bank union pact doesn't provide much comfort.

Other Top Tier Risk Appetite Influencers

Beyond US and EU data, the other potential risk appetite mover is the China HSBC flash manufacturing PMI on Monday.

We would also pay careful attention to oil prices, for reasons discussed in the conclusions section below.

Sample Retail Traders Positioning

The latest COT report (Tuesday June 27th) showed a slight net increase in short EURUSD positions, as new shorts were nearly equaled by new longs coming in when the pair was hitting 1.35.

Our favorite real time sample of retail traders confirms the COT's less timely report, showing a slight shift to the short side, too slight to really matter.

Source: Forexfactory.com

05 Jun. 22 01.18

Conclusions

Technical picture is neutral in the near term per the daily EURUSD chart, bearish in the medium term per the weekly chart.

Fundamental outlook is neutral given that both central banks, the Fed and ECB, are keeping policy steady in the coming months. EUR data gains some importance because it might influence the pace and timing of future ECB easing and the odds of when a QE program could come. When we discuss what could move the pair, we mean move it within a relatively tight range of 1.35-1.37 given that central bank policies are static and are keeping the gap between USD and EUR rates static. Like stocks, the EURUSD is in low volatility mode.

In the near term then, the pair is range bound within 1.35-1.37, and likely to drift with overall risk appetite given that EU and US rates remain static.

What could change these conclusions? I spike up or down in growth or inflation data on either side of the Atlantic. There are no likely imminent sources of new volatility, as markets (except for crude oil) continue to ignore events in Iraq, Ukraine, and Chinese-claimed offshore regions. That said, both Iraq and Ukraine have potential to send energy prices soaring and THAT could indeed undo the benefits of central bank stimulus and spark a bout of risk aversion that would send the EURUSD lower.

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Disclosure/Disclaimer: the above is for informational purposes only, responsibility for all trading or investing decisions lies solely with the reader.

Source: EUR/USD June 22 Weekly Technical, Fundamental Forecast: A New Set Of EUR/USD Drivers?