24 June 2014

Where now for EURUSD?

​The euro-dollar pair is proving an interesting trade right now as investors weigh up the various signals from central banks.
​​​​​​​iphone_auto_tn_300.pngThe euro-dollar pair is proving an interesting trade right now as investors weigh up the various signals from central banks.
 
While the Federal Reserve is pressing ahead with its tapering, the signals from the bank’s last policy meeting were more dovish on rates.
 
At the same time, the European Central Bank is finally peeling itself away from its hawkish position to adopt a looser stance. After slashing them further, Mario Draghi has said rates could remain at almost zero for another 2.5 years. 
 
“We have prolonged banks’ access to unlimited liquidity up to the end of 2016. That is a signal,” the ECB president said in an interview with Dutch newspaper De Telegraaf.
 
Meanwhile weak growth in the eurozone is dragging on sentiment - disappointing PMI data showed business activity slowed for the second month in a row in May. At the same time the German Ifo business climate index fell to a six-month low of 109.7.
 
Rates “will increase when the recovery will firm up”, added a hopeful Draghi.
 
It’s a confusing picture but John Hardy. Head of FX Strategy at Saxo Bank, is looking for more from the EUR/USD pair amid ultra-low volatility and some very “sticky” resistance levels.
 
“We have this huge 200-day moving average which also coincides with some recent highs,” he says, adding that 1.3680 is where the key resistance level is.
 
But there seems little chance of any big moves right now, especially as investors are fixated on central bank policy.
 
The overarching narrative is the Fed and how much did last week’s FOMC meeting really mean for EUR/USD?
 
Unfortunately there wasn’t actually a lot in there of note - just more of the same from the Fed as it said rates would remain low “for a considerable time after the asset purchase program ends”, and for “some time” after inflation and labour market conditions return to normal.
 
Hardy points out that this was seen as dovish versus market expectations for a slightly greater bias towards tightening, but worries whether the market has got it right.
 
“Clearly if we just look at the wording, how little changed to the statement, it did appear very much on the dovish end of the spectrum,” says Hardy, who adds that there was some dollar selling off the back of the announcement as investors sought out a bit more risk.
 
But is the dovish reaction to the latest Fed statement actually warranted? True, there was no further indication about when rates would rise, but the taper continues apace and the data from the US is supportive.
 
Real interest rates, which were “rather high” going into the meeting, have “hardly budged”, says Hardy.
 
“And since they haven’t come that much lower, it makes you wonder is this dovish reaction was justified,” he adds. “Is the market second-guessing what the Fed is doing?”
 

So will the EUR/USD pair break out from its “huge” 200-day moving average and what will be the catalyst for the change should it come?

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