In the previous EUR/USD forecast, we observed a bullish close for the currency pair. It was just above the significant sentiment and technical region of 1.1. As the region might exert pivotal influence, it would be crucial to monitor for any signs of consolidation. A continuation of the bullish momentum would need to clear the 1.11 resistance before a move on the middle bollinger band and 1.12 could be attempted.
Encouraging economic data from China resulted in some uplift to the market sentiment. On the other hand, the US released a number of weak economic data. The ECB would be releasing the latest Main Refinancing Rate, together with the Monetary Policy Statement and Press Conference. There was expectation of a cut to the deposit facility rate from -0.4% to -0.5%. There were also speculations that further quantitative easing would be introduced.
Looking at the EUR/USD weekly chart above, we see a bullish price action and an attempt to test the 1.11 resistance as expected. The EUR/USD had since eased towards the downside. There is no clear indication to suggest an end to the bearish trend. We need to continue monitoring the shorter time frames to observe if there are further signs of a consolidation.
A continuation of the bullish recovery will see a retest of 1.11 before heading towards 1.12. Considering that the region of 1.12 is a major sentiment and technical region and that the middle bollinger band is also in the vicinity, we may be expecting a significant resistance.
If the bearish momentum returns, we will likely see a challenge of the 1.1 region. Similarly, it is a significant sentiment and technical region with the lower bollinger band in the vicinity. Therefore a significant support is expected.
US China Trade War Relief
The week brought about a break in escalating tension between the US and China. China announced an exemption of 16 US products from new tariffs until September 2020. US President Trump also eased the situation by holding off a 5% increase in tariffs for two weeks. It was initially scheduled to start on 1st October. This is likely seen as a gesture of goodwill as China celebrates it’s 70th founding anniversary next month. These developments are likely to create a more conducive climate for the negotiating teams that are scheduled to meet in October.
In view of the positive developments, risk appetite has picked up in the markets. This results in traders seeking riskier assets such as the equities. In the case of European equities, the Euro currency will be in demand and hence likely provided upside lift for the EUR/USD.
ECB As Per Expected
As per our previous forecast, the European Central Bank did indeed cut rates to -0.5% from -0.4%. In addition, a new Quantitative Easing measure has been announced. It is scheduled to start on 1st November and amounts to 20 billion euro per month. ECB President Draghi mentioned that the decision was made due to the observation of muted inflation. He also mentioned that downside risk remains and the Euro region growth and inflation forecasts have been revised lower.
The EUR/USD dipped significantly with this development but had since recovered and climbed. This may be due to the increased risk appetite as additional QE will result in ample liquidity. As investors buy into European equities, demand for the Euro currency will increase. This serves as a reminder for all that short term price action is highly sentimental in nature. Sentiment can change quickly and hence it is crucial that the shorter time frames are monitored.
Positive US Data Contributes
The US Consumer Price Index, Retail Sales and Preliminary UoM Consumer Sentiment were all better than expected. While this is usually good for the US dollar, the market’s sentiment for the week is risk seeking and hence this positively is likely to result in increased risk appetite, further weakening the US dollar in lieu of riskier assets.
Next Stop, US Federal Reserve
The US Fed is due to release the Federal Fund Rate in the coming week. Many analysts are expecting a 0.25% cut to the interest rate. Traders usually prefer a currency with high interest rate and hence a cut may lower the demand for the US dollar. A number of analysts are also expecting a statement that doesn’t suggest further immediate cuts as the recent economic statistics are not suggestive of a dire climate. Any deviation to this expectation may cause increased volatility. The US President Trump appears to be of the opinion that more should be done by the US Federal Reserve as seen from a number of his tweets.
The Week Ahead
We are expecting a number of high impact economic events.
German ZEW Economic Sentiment
As a survey of analysts, this sentiment report holds a weight. Their sentiments may be derived from their working knowledge of the economy and hence may be an early indicator of economic health.
USA Building Permits
The construction of a building generates many economic activities. Jobs will be created for construction workers, the various sub contractors and services associated with new buildings such as power, water, furniture and so on.
USA Crude Oil Inventories
Movement of oil supply may bring insights to the level of general economic activities. For example, an increasing supply may suggest excessive production or diminishing demand. A reducing supply on the other hand may suggest an economic pick up.
USA FOMC Economic Projections
USA FOMC Statement
Interest rate and economy related statements are given much attention by analysts and investors as it has a direct impact on the currency. Investors usually favor a currency with a higher interest rate and will analyse these statements thoroughly for insights on the interest rate policy.
USA Federal Funds Rate
A high interest usually generates demand while a low interest may result in dumping of the currency for better yielding alternatives. Therefore the interest rate result usually has a significant impact, especially when it is an unexpected result.
USA FOMC Press Conference
Press conferences may go into unscripted territory during the Question and Answer segment and hence may spur unexpected developments and volatility.
USA Philly Fed Manufacturing Index
This survey of manufacturers is important as the sentiment of businesses is a leading indicator of economic health. A healthy sentiment suggests that an economy is moving along well and with the activities of the businesses, downstream benefits will happen such as employment and investment.
There are many more events and hence it is important to follow an economic calendar. By doing so, you can reduce the possibility of an unexpected development affecting your trading plan.
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Traders should always practice proper money management and seek to understand the underlying tones for the market.