Euro/dollar, the world’s most popular currency pair, has suffered long spells of low volatility during 2017. Yet in the final week, as many traders are on holiday, it is making a remarkable move to the upside, rising on natural flows, something we haven’t seen for quite some time.
The pair is trading at 1.1982 at the time of writing, adding 40 pips in the final trading day of the year after gradually moving higher early in the week. The round number of 1.20 is very close. Should we have a breakout, the next level to watch is the 2017 high of 1.2090, which still seems far at the moment.
We did have some economic data released from the euro-zone today: Spanish CPI missed expectations with 1.2% y/y. Initial inflation figures from Germany’s states show lower y/y inflation figures. M3 Money Supply is up 4.9% as predicted while private loans also met predictions with 2.8% y/y.
As you can see, the data does not really support the gains. So what is going on? Here are three reasons for the rise:
- Natural flows: when nothing happens, EUR/USD rises. The currency area has a trade surplus and the US has a deficit. Usually, top-tier economic indicators, politics and other types of speculation drive currencies. But when everybody is on holiday, it’s just the flows of imports and exports that make the difference.
- US dollar sell-off: We are seeing an extension of the “sell the fact” response to the successful passage of tax cuts in Congress. The dollar had increased prior to the approval and is now selling off.
- Not so great US figures: consumer confidence, jobless claims, and the trade balance numbers all fell short of expectations. While none can be defined as a top-tier gauge, the accumulation of negative figures eventually took its toll.
Where will EUR/USD go in 2018? It is hard to say, with political uncertainty around the Italian elections, US politics, the potential end of QE in Europe and the unknown quantity of rate hikes in the US.
Here is the one-hour chart:Get the 5 most predictable currency pairs