We have seen quite a choppy price action in the EUR/USD the past week, in a context where the risk appetite ended up better positioned and collaborated with the pair's second weekly close with gains. It seems that 'resilience' is the name of the game now, amidst rumours and counter-rumours mainly from ECB officials. The net result was only one however: a stronger EUR. The salient points (or where volatility bouts took place) came from the mixed data from the German/EMU ZEW Survey at the beginning of the week, and when news agency Bloomberg cited the possibility that the ECB could adopt negative deposit rates, sending the EUR/USD to 1.3450 by midweek. This knee-jerk was further confirmed by the FOMC minutes, leaving the door open for the start of QE tapering in the near future. Mixed results from flash manufacturing and services PMIs for the month of November added to the selling pressure on Thursday, although the 1.3400 support demonstrated to be too tough for EUR bears to overcome.
ECB vs. Fed, another round
The recent FOMC minutes brought in some strength for the greenback, boosting the US Dollar index above the 81.00 handle, albeit this spike was faded soon after. The Committee kept alive the likelihood of a taper in December, hinging of course on better US data. Retail Sales in the US economy plus a solid PMI sponsored by Markit and another drop from Initial Claims gave the USD further support, although the risk appetite trends were already growing bigger, almost ignoring these results. It seems that markets are now taking it more seriously the idea that 'tapering is not tightening', and that the timing of the Fed to start scaling back its monthly bond purchases is coming to a second role, this being highly emphasized by the recent Fedspeak. Much has been talked about the chances that the Fed could lower the unemployment rate from the current 6.5% and thus securing the lower rates for longer, but currently these are only speculations that they might come true (or not) when Janet Yellen becomes the Fed's first Chairwoman.
It took 24 hours for ECB's President Mario Draghi to (almost) rule out negative deposit rates, this being the foundation for the subsequent EUR rebound from the vicinity of 1.3400 the figure. The first stop was a new visit of 1.3480, paving the way for a test of the 1.3550 area on Friday. The IFO indicator exceeded even the most optimist bets on Friday, showing healthy improvements in all of its components. This, coupled with solid German GDP figures for the third quarter - eclipsing France's contraction inter-quarter - gave the EUR the final boost, against a backdrop of increasing risk-on trade and optimism amongst traders.
So, when the Fed would start its QE tapering remains yet elusive. While market participants would gauge any US economic result against this possibility, and thus playing with expectations, all is still covered by a mantle of uncertainty. Speeches by Fed's members just give partial and independent views on the subject, but the timing is still unclear. On the EUR side of the equation, the persistent current account surplus in the euro area and the strong recovery and overall better economic conditions in Germany would give further support to the single currency. Disinflationary pressures would become more and more relevant in case of further appreciation of the spot, with the ECB expected to increase the dovish rhetoric in this case. The ECB's officials seem too busy to deal with the high unemployment rate at the moment, although it will come the time when it could be no longer ignored. Speculations about another LTRO, negative deposit rates and even some sort of QE insinuated by ECB's Peter Praet would be omnipresent, but their implementation would lack of conviction amongst investors. The divergence in monetary policies and economic prospects between the euro area and US would be the main factor in determining the pair's direction, although at the moment, speculations look set to rule. At least until de next FOMC meeting and the ECB's year-end forecasts, both due in December.
Towards year-end and even the first quarter of the next year, I see spot holding well above the psychological 1.300 handle. On a long-term perspective I expect the EUR to start weakening against the USD as we get closer to the start of the Fed's QE tapering. And keeping the bearish tone towards the mid 1.20s throughout 2014 seems reasonable at the moment.
In the technical space, the pair is flirting with the bottom line of the 5-month rising channel around 1.3550, coinciding with the 38.2% retracement of the September-October bull run. The interim resistance lies at 1.3584 (November's high) ahead of the 1.3645/61 area (October 3rd high and 23.8% retracement) and followed by the 1.3700 psychological handle. On the downside, the 50% retracement at 1.3469 should hold the initial test. In case of further selling impulse, 1.3398 (Bloomberg rumours of negative deposit rates) would come into play previous to 1.3295, post-ECB rate cut. According to the last COT report (19th November), Non-commercial speculators trimmed their EUR long positions further to 8.9K contracts from 16.8K in the previous week and 70.6K at the end of October. There is nothing worth mentioning candle-wise.
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. (More...)
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