EUR/USD: The Party Continues In Berlin

Includes: UDN, UUP
by: FXstreet

Well, well… we can say everything of the past week, but 'boring' would definitely not make it! Markets started pushing higher from the very dawn of the week after Larry Summers stepped down of his run-up to succeed Chairman Bernanke at the Federal Reserve.

The move was certainly cheered by the risk-appetite community, as that left the more dovish candidate and current Vice Chairman Janet Yellen as front-runner for Bernanke's throne. Moving forwards and more linked with the data per se, consumer prices in the euro area banged expectations in both the headline and core prints, expanding at an annual pace of 1.3% and 1.1%, respectively, well below the ECB's 2.0% target. The always relevant ZEW Survey came in next, surprising investors and advancing above previous estimates, adding sustainability to the nascent recovery in the bloc. However, the pair barely moved as market participants had the upcoming FOMC gathering on focus. And so Bernanke & Co. caught almost everybody off guard, delivering the unexpected: nothing. The rest of the week was merely anecdotal, with only worth mentioning the better flash EMU's consumer confidence for the month of September despite still dwelling in the negative territory.

The dollar side of the equation

Allow me to take you back to early July. The EUR/USD was threatening to challenge (breach?) ytd lows around 1.2750 ahead of the release of the FOMC minutes from the 19th June meeting. What happened? Briefly, a more than expected dovish tone from Chief Bernanke, resulting in the EUR posting a whooping spike to 1.3200 vs. the greenback and signaling at the same time the beginning of the end for the world's reserve. As an immediate consequence, the implicit floor of the pair was lifted to 1.3100 from 1.2700. Traders commenced to change their perspectives to bullish from bearish/neutral and speculative positioning started to gradually scale back its short euro positions. However, the shadow of QE tapering was yet looming, with market expectations practically assuming the Fed would start to scale back its monthly bond buying in the September 17th-18th gathering, focusing at the same time in the size ($5-$15 billion) and the subsequent forward guidance chatter (maybe lowering the unemployment rate threshold from 6.5%). So we arrived at the crucial FOMC meeting from last Wednesday.

The table was set. The long-waited 'Septaper' never left the cocoon. According to Bernanke and fellow members of the FOMC, the recent string of US data did not warrant fewer stimuli. The status quo remained unaltered. And once again, the EUR/USD rapidly left behind the former tough resistance band at 1.3400/50, climbing to the very doorsteps of 1.3580. What happened in the remaining two days of trading was irrelevant and logical, with some profit taking and wishful thinking regarding the possibility of 'Octaper', leaving the pair to close the week just above 1.3520.

What about Draghi?

However, this violent ascent of the pair would not be welcomed amongst the ECB's desks, let alone for Mario Draghi. It would be premature (wrong?) to consider the recent green shots spotted in the 17-nation bloc as strong signals that the euro zone is already out of the woods. High unemployment, very tight credit conditions and weak balance sheets remain not minor headwinds the euro area still faces and needs to overcome. The specters of another LTRO and even a refi rate cut are hovering over the markets as maybe the most immediate tools the ECB possesses to remove impulse from the EUR rally. Recall that President Draghi stressed his views of an export-based recovery during the second half of the present year. It thus seems that a weaker euro is needed to rebalance the economy. This is contemplated as the main hurdle euro-bulls face on their way to 2013 peaks above 1.3700 the figure.

From the Brandenburg Gate

At the time of writing, Chancellor Angela Merkel and her CDU/CSU coalition are just shy of the absolute majority in the German Parliamentary elections. The anti-euro AfD party remains mired around the 4.8% - hence no seats at Parliament - while the Green Party admitted their election was 'disappointing'. Despite the results being euro-supportive, they were also expected. However, we might see the EUR/USD spike after the opening bell in Asia ahead of the PMI data.

Upcoming events and technicals

What does this week's docket bring to the table? A priori, there seem to be contrasting forces struggling to get predominance on the pair's price direction ahead in the week. Advanced manufacturing/services PMI prints from euro zone members, the German IFO and Gfk Consumer Confidence Survey would be pointing to a continuation of the recent positive results and thus fueling the EUR rally. On the other hand, ECB's Draghi's speeches on Monday and Friday are expected to be on the dovish camp, trying to 'talk down' the EUR strength. Several gauges of EMU's confidence/sentiment are also expected as well as consumer prices in Germany. Across the pond, heavy Fedspeak throughout the week would bring in further details of the recent FOMC no-taper. The third release of the US Q2 GDP figures, Consumer Confidence and the consumer sentiment sponsored by the Reuters/Michigan index will be in the limelight as well.

All in all, an extension of the current EUR rally and a test of ytd peak at 1.3711 should not be ruled out, as there is practically no noticeable resistance on the way up from current levels. Should the negative trend prevail, the first support area would be the 23.6% Fibonacci retracement of Feb-Apr slide at 1.3340/45, followed by the 1.3315/00 area (21-day moving average and psychological level). If further selling pressure sharpens, then the 1.3230/60 region (38.2% retracement and 55-day moving average) should provide decent support.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.