-SUMMARY-
The long term downtrend of the $EUR/USD is currently being retraced and has formed a short term uptrend. Price is a long way from resistance at $1.139 and that value is not currently expected to be achievable.
This uptrend is supported against moves lower due to the sentiment towards Fed Policy which is weakening the USD as markets price in a pivot due to the recently softer than expected CPI report.
This optimistic sentiment is likely to be tested on Wednesday when the FOMC minutes are released. Any hint of a dovish tilt is likely to further weaken the USD and spur the EUR/USD higher. As the meeting occurred before the soft CPI data, the risk that it will be interpreted as hawkish is likely to be negated.
Analysis indicates that the Euro has a weak outlook ahead and so Risk Level One orders to sell the $EUR/USD while below 1.076 have been placed.
FUNDAMENTALS
-EURO-AREA-
On the 27th of October, the Main Refinancing Operations Rate was hiked by 0.75 to 2.00 percent. This matched the market expectations as well as the 0.75 percent hike at the September meeting.
This is the third consecutive rate hike and the Governing Council commented that higher rates are to be expected. Future hikes are made on a meeting-by-meeting approach.
Principal payments from maturing PEPP securities will be reinvested until at least the end of 2024.
The next meeting is on Thursday the 15th of December and the long term outlook is for higher rates.
The outlook for:
- EA GDP is pessimistic deterioration (pr. )
- EA CPI is pessimistic improvement (pr. )
- EA Unemployment is indifference (pr. )
-UNITED STATES-
On the 2nd of November, the Federal Funds Rate was hiked by 75bps to between 3.75 and 4.00 percent. This matched the market expectations and also matched the previous hike at the September meeting.
This is the sixth consecutive rate hike and borrowing costs are now at the highest since 2008. During the press conference, Chair Powell commented that the rates will be higher than previously expected.
The next meeting is on Wednesday the 14th of December and the long term outlook is for higher rates although it is likely that rates will be more hawkish than expected.
The CME FedWatch tool indicates 71 percent odds of a 0.50 hike and 29 percent of a 0.75 hike (pr. 80/20).
The outlook for:
US GDP is pessimistic deterioration (pr. )
US CPI is optimistic indifferent improvement (pr. )
US Unemployment is pessimistic deterioration (pr. )
SENTIMENT
-FED POLICY DISBELIEF SUPPORTS THE EUR/USD AGAINST MOVES LOWER-
On Wednesday the 2nd of November the Federal Reserve hiked rates by 0.75 percent and commented that it would be better to raise too-high rather than too-low. This has been interpreted as a hawkish move.
A couple of weeks ago, US CPI came in a little lower (better) than expected and speculators are re-positioning for a Fed pivot. However - this would be against the grain of what was mentioned at the previous Fed meeting where rates were hiked 0.75 percent and Chairman Powell remarked that it would be better to raise too-high than too-low.
TECHNICALS
-SHORT TERM-
The short term view (month on month) shows that the EUR/USD has been downtrending since last month that began in late-October when a hawkish ECB meeting soured the sentiment towards growth.
This pessimism remains but the EUR/USD has retraced some of the fall due to a weaker US Dollar. This is as a result of positioning against the Fed’s hawkish rhetoric. The market does not appear to believe that the Fed will over-tighten in the face of a contracting economy and job losses.
The short term view (month on month) shows that the EUR/USD has been uptrending since the start of the month (November) when the Fed hiked rates and made hawkish comments but the market still believes it will pivot.
This uptrend was further supported when the US CPI report came in slightly lower than expected and weakened the US dollar.
The pair has since found a stable level around 1.03.
-LONG TERM-
The long term view (year on year) shows that the EUR/USD has been downtrending since last year, which began in mid-2021 when the Federal Reserve began to comment on tapering off its stimulus plan.
This fall was pressured further as safe haven flows into the USD picked up this year in February 2022 as Russia invaded Ukraine. The subsequent sanctions that followed and lack of supply to the energy markets pushed global inflation higher than had been anticipated and central banks have had to tighten at a record pace. This has lowered global growth which keeps the US Dollar higher and Euro lower.
Recently, the EUR/USD is retracing the fall although the price is far below the confirmed previous retracement at $1.139.
-INTERMARKETS-
S&P 500 moving to the upside with bearish trajectory, bullish momentum.
US Treasury Yields moving to the upside with bearish trajectory, bullish momentum.
The sentiment narrative that is driving the market is the belief that the Fed will pivot. The expected effects of this are for upside moves on the S&P 500 and downside moves on treasury yields.
The intermarkets appear to suggest that there is still some indecision about a fed pivot and that the narrative could still move in either direction indicating risks for the EUR/USD to both downside and upside.
-END DISCLAIMER-
- Copy the trade plan with an investment at www.etoro.com/people/jeepsontrading
- Detailed analysis over at at www.jeepsontrading.substack.com
- The content provided is intended for informational purposes only. Investments on the forex markets and trading decisions are made at your own risk