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EUR/USD: Bears on the fast train to challenge 1.13 the figure

  • EUR/USD has been hit hard ahead of the ECB meeting tomorrow, falling from a high of 1.1476 to a low of 1.1379.
  • EUR/USD has been suffering due to a mix of poor data, technicals and ongoing political angst between Brexit to Italy.  
  • The greenback is also catching a bid due to the positive US data and markets continue to back the buck due to the divergence between the US economy and Central Banks.
  • ECB to leave policy on hold – TDS

First of all, we are in a volatile environment, and the divergence between US equities and the rest of the global equity market looks set to narrow. Markets behave with a herd mentality and can be fickle for that reason, but the bull market in the US is running out of backers all of a sudden. It has been well telegraphed from many years that the Fed is on a tightening path and were reducing their balance sheet.   However, it is only now that the complacent bulls of this market have suddenly woken up and have not only smelt the coffee but have downed cups of it and are now fully charged and sprinting to the exits.

The knock on effect is weighing on market sentiment. As a proxy to risk, the euro is suffering partly because of risk sentiment, but also it is carrying the burden a troubled eurozone project with the likes of Greece, Brexit and the Italian budget all playing their role in the longer term decline in the single currency.  

The latest from Italy is that the Italian Economic Minister, Tria, has said that the Italian budget is correct and he sees no reason to present a new budget to the EU. This follows yesterday’s news that Conte says Italy won’t accept substantial changes to the budget – “There is no plan B on the 2019 budget”.

The implications of this egregious rhetoric from Italy, considering that the European Union has demanded unprecedented changes to bring the country into line with its spending rules, put the country’s populist government on a collision course with Brussels as its spending targets far exceed EU limits.  

Just as Commission Vice-President Valdis Dombrovskis told reporters in Strasbourg yesterday, “Europe is built on cooperation. The euro area is built on strong bonds of trust.” If Italy starts to break these bonds of trust and while Britain is adamant of leaving, Greece as being a ticking time bomb as well, (recently advised by the
Greece debt crisis veteran, Yanis Varoufakis, to quit the euro), then who is next to challenge the office of bureaucrats in Brussels?  

ECB outlook

As for the ECB, no changes are expected and nor to its forward guidance on monetary policy following tomorrow’s Governing Council meeting. What markets are looking for is whether their views on the economic outlook and risks have worsened considering the amount of recent turmoil in Chines markets, the latest Wall Street rout, trade angst, political angst and the list goes on …

Nick Kounis & Aline Schuiling, economists at ABN AMRO, think that core inflation will undershoot ECB forecasts against the background of slack in the eurozone labour market as a whole and relatively moderate economic growth. They warned that the risks to the economic outlook are to the downside.  

“Our base case is that the ECB will raise its deposit rate by 10bp in December of next year, taking it to -0.3%. The risks are skewed towards the later.”

With respect to the divergence between the Fed and the ECB, the economists argued that by the end of next year, Fed rate hikes will be behind us, and US economic growth will be slowing – “The ECB may then be in a position to deal with significant euro strength if it were to move too quickly. We, therefore, think financial markets are too aggressive in their current pricing.”  

If you add all of these risks up and then consider the US current economic divergence and Central Bank rate paths, it would indeed seem that the  Bears just bought a ticket  for the fast train on the way to 1.13 the figure.

EUR/USD levels

Valeria Bednarik, Cheif Analyst at FXStreet explained that the EUR/USD pair accelerated once it broke 1.1430, its former October low, and has now little in the way toward 1.1300, the yearly low posted mid-August:

“The pair recovered some pips after bottoming at 1.1378 but maintains a strong bearish stance according to technical readings in the 4 hours chart, as the decline accelerated after multiple failed attempts to overcome its 20 SMA. The Momentum indicator maintains its sharp downward slope while the RSI also heads south within oversold levels, maintaining the risk lean to the downside despite the ongoing bounce.”

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