Dull Skies Ahead For The Euro

by: Sandeep Singh Ahluwalia

Eurozone’s Industrial Production level in October fell to 0.3%, from a prior rise of 1%.

Eurozone’s Inflation level in October stood at 2.2%, which is the highest inflation rate seen since December 2012.

Germany’s ZEW indicator of economic sentiment rose in October by 0.6 points to -24.1.

From September 2018, the Euro’s (EUO, FXE) Index has been in constant decline which has resulted in the currency tumbling by roughly 6%. However, the daily chart of the index tells a different tale. This is as the bulls last week commenced a bullish reversal which has resulted in the currency rising by 1%. However, I believe the bullish run will come to an end in the next one to two sessions, which will result in the Euro tumbling until the 1.1199 mark. Thus, to establish the probability of this occurring, I shall look at the fundamental news affecting the pair whilst also analyzing the charts using technical analysis tools.

Fundamental news:

Eurozone’s industrial statistics:

The latest set of statistics coming out of the Eurozone are severely bearish for the Euro. This is as the Industrial Production level in October fell by 0.3%, after having a rise of 1% in the prior month. Moreover, the inflation level came in at 2.2%, against a prior value of 2.1%.

This is the highest inflation rate seen since December 2012. Lastly, the Eurozone’s economic sentiment indicator fell for the tenth consecutive month in October to 109.8, from a prior value of 110.9. All these negative statistics will place a great deal of bearish pressure on the Euro, as it shows that the European economy is performing poorly. This in turn will reduce investor confidence levels.

German statistics:

Germany is ranked as one of the most powerful members of the European Union. Thus, if German statistics were to weaken then this would trigger a bearish run on the Euro. I chose to highlight this as the latest German statistics are clearly not up to the mark. I say that as the German economy in the three months prior to September shrank by 0.2%, after having a 0.5% rise in the previous period. Moreover, the decline was worse than expected as analysts had pegged the statistic to fall by 0.1%.

On the other hand, Germany’s ZEW indicator of economic sentiment rose in October by 0.6 points to -24.1. This surpassed analyst estimates of -25. However, it still isn’t a statistic that investors should be happy with. I say that as the value of the indicator is deep into negative territory, which will cause the Euro to have a bearish continuation. Moreover, the situation is made worse as the majority of the survey participants stated that they do not expect a swift recovery in the economy.

Italy and the European Union:

The current standoff between the European Union and Italy will not be coming to an end any time soon. This is as Italy ignored the European Union’s deadline of midnight Tuesday, as it refused to revise its budget. Moreover, the Italian government stated that it would stick to its growth forecast of 1.5% and deficit target of 2.4%. This move by the Italian government breaches the European Union's fiscal rules. Thus, the big question now is what’s next?

I believe the European Union will be forced to respond to Italy’s stubbornness with financial sanctions worth billions. However, the markets have already responded to the prospect of this with a big thumbs-down. This is as Italian bonds have risen sharply and the Milan stock exchange has fallen by 2%. Hence, if sanctions were to come into place then this would trigger a strong bearish run in the Euro.

Brexit’s effect on Italy:

British Prime Minister Theresa May on Wednesday evening outlined her proposal on how to take Britain and Northern Ireland out of the European Union. This proposal proved to be detrimental for Theresa May as it triggered four resignations from her government.

This may be bad news for the British Pound, but I believe it will also impact Italy. I say that as a chaotic outcome in the Brexit negotiations would complicate the unstable Italian situation further. This is as it shall cause severe instability in the financial markets across Europe, which in turn would make the Italian situation an unstable storm. This would greatly affect the value of the Euro.

Technical analysis:

Daily chart:

Euro Index Daily chart The currency’s daily chart indicates that the Euro's Index will be having a bearish reversal in the coming one to two sessions. I expect this due to the formation of a ‘Tweezer Top’ candle pattern. This pattern psychology indicates to investors that the tide of the market has changed from one in which the bulls were in control, to one in which the bears are calling the shots. Moreover, the pattern received bearish confirmation as it formed at the 100% Fibonacci resistance level at 1.1391.

On the price target front, I expect the Euro to fall until the 100% Fibonacci support level at 1.1199. However, if the Euro does breach the 100% Fibonacci support level, then I do not expect the tumble to go beyond the 127.2% Fibonacci support at 1.1109.

On the indicator facet, the RSI of the Euro has commenced a descent which has resulted in it breaking below the 70 mark. This supports my notion that the Euro will be having a fall until the 100% Fibonacci support level at 1.1199. Furthermore, the ADX has turned flat, hence, signaling to investors that the bullish trend has stalled.

Weekly chart:

Euro Index Weekly chart The Euro’s weekly chart articulates a different story from the fundamentals of the currency and the technicals of the daily chart. I say this as the Euro’s weekly chart shows that the bulls are trying to commence an ascent. This is as the Euro has formed a ‘Hammer’ candle pattern, which indicates to investors that after a last burst of selling, new buying has commenced. Moreover, the long lower wick of the candle pattern shows the rejection of lower prices, which indicates a change in the balance between the bulls and bears.

However, I would not pay much attention to this as four weeks ago, the Euro formed a Hammer candle pattern which failed to stop the currency's descent. Moreover, the fundamentals of the Euro are currently extremely shaky, which will force the currency to have a bearish continuation.

The big picture:

Overall, I am leaning towards the bears pushing the value of the Euro Index to the 1.1199 mark. This is driven by the fact that the fundamentals and technicals support a descent in the currency’s value until that point. However, whichever way you decide to trade, do ensure that you utilize trailing stops, as this shall aid in capital preservation.

Good luck trading.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.