- EUR/USD has dropped below the base of the cloud (1.1656) and to a low of 1.1641 where it has started to consolidate at the lower hourly Bollinger line and holding just above oversold readings in RSI.
- The downside is playing out as markets turn risk-off on Thursday due to contagion risks from the Argentinean chaos that is concerning investors.
The greenback has picked up a safe-haven bid, even outperforming the CHF but not the yen, albeit stabilising still around 111.20. EUR/USD was capped at 1.1734, 18 pips below the daily Ichimoku cloud top at 1.1752. There is some support there but this is fragile, certainly on both a technical and fundamental basis.
- Market abuses Mauricio Macri’s desperate plea and sends peso down a further 8% in a flash
Fundamentally, the eurozone crisis is back on the lips of desks and investors who had been saying, “As long as the crisis remains mainly isolated to Turkey, spillovers to the euro area and other G10 countries are likely to be muted. The ECB remains on track to continue its taper later this year and raise rates in 2019H2,” analysts at TD Securities said back on the 14th August.
- Emerging Market Chaos returns – AmpGFX
However, as Greg Gibbs, Founder, Analyst, & PM at Amplifying Global FX Capital Pty Ltd an Australian financial services company explained, emerging market chaos has resumed and is spreading to some USD strength against majors.
“The EUR has weakened modestly so far on Thursday but has been much more stable and stronger since the first round of the TRL crisis in mid-August, notwithstanding widening Italian yield spreads,” Greg Gibbs went on to mention. However, emerging market risks are mounting up again due to the sell-off in the Argentinean peso and Turkish Lira. Contagion has already spread to Lebanon, Columbia and South Africa, according to an Institute of Financial Research (IIF) report.
“The EM selloff has been large for Argentina and Turkey, which raises the risk of contagion to the broader EM complex”¦Concentration risk exists in Lebanon, Colombia and South Africa, and could be a channel for contagion to the broader EM complex,” the report said.
Markets are bound to push out ECB rate hike expectations to 2020
Emerging market countries with the highest levels of foreign cash flows are most likely to be hit by contagion. However, the Eurozone’s creditors of such nations are also exposed, which is something that the ECB have been concerned about. Shares of European banks SX7E – particularly those with sizeable operations in, and exposure to Turkey – sold off after reports that the European Central Bank was increasingly concerned about some lenders. The index dropped to as low as 104.20, on the 15th Aug. Today, the index is down to 105.04.
Markets are bound to push out ECB rate hike expectations to 2020 should this de-risking momentum continue. The EM balance-of-payment pressures have been driven by the trio of higher US bond yields, rising oil prices and USD appreciation and although the former two have eased, EM jitters look set to persist, according to analysts at Nomura. Their European team, back in May this year, had pushed back the expected timing of the ECB’s first rate hike to Q3 2019 from Q1 2019.
Meanwhile, US data has been beating expectations and the Fed is hell-bent on raising interest rates, which will only damage the emerging markets further in due course. Eyes should be kept on the DE/US spread which is widening in favour of the greenback.
EUR/USD levels
From a technical standpoint, the 21-D SMA is a target now that the price has broken below the rising trend line support, below the cloud base and the 27th Aug low. The 21-D SMA currently stands at 1.1538. However, first support comes in at the 50-D SMA at 1.1616 and then 1.1580. A break below the 21-D SMA opens risk to the August low at 1.1301. On the flipside, “nearby resistance is offered by the 1.1745/50 then 1.1790 recent highs, these should offer a tough near-term barrier. A recovery above here will trigger a move to the 1.1853 mid-June high and the 1.1922 55 week ma,” analysts at Commerzbank explained, however, arguing that the recent low at 1.1301 was a significant turn for the market.
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