Forex Trading: EUR/USD


The strength of the dollar we observed during last year’s US elections has evaporated. The dollar index that shows the condition of the American currency is at the level it was back on November 9, 2016.

The Trump administration has promised a lot, but hardly anything has happened since then. The tax law has been postponed to the near future, but still to be defined. Clearly we see that the market has severely ruled out the improvement of the situation that was supposed to happen under the baton of the new president.

Dollar Index Chart

Over the past few months, the dollar has reacted more strongly to political news than to macroeconomic data. The most recent, a rather disappointing report on the US employment market has led to an EUR / USD pair gain of about 80 pips.

In previous years, this has been two or three times greater. Bad inflation data has contributed to a similar reaction. A rather flattering statement issued by the FED caused the main pair of the currency to fall about 150 pips, after which part of the movement was corrected.

Donald Trump’s election alone has moved the Eurodollar from 1.13 to 1.0345, which is around 9.5 percentage points and 950 pips. This happened in less than a month and a half.

Not only has the EUR/USD returned to pre-presidential levels, but the yield on 10-year US bonds is also significantly lower (2.16%). The spread between German and American bonds of 10 years of morbidity has declined, and currently oscillates around 1.9%. The movement in the bond market should trigger a boost towards an appreciation of the USD (mainly the increase in US debt instruments).

Chart EUR/USD (blue line) and a difference in the percentage rates of US and German 10-year bonds (red line)
Graph of Inflation CPI (annual) and inflation CPI (annual), United States.

Clearly, the absence of Trump’s pledges is not the only cause of the evaporation of the dollar’s strength. We can see that the inflation pressure in the United States has been declining successfully since March. CPI inflation has fallen below 2% (last reading was 1.9% per year), while base inflation, which has been very stable since January 2016 (2.1% -2.3%) is now 1.7% which puts it at the highest level since June 2015. As for the remaining macroeconomic figures, it does not look too good either.

Retail Sales, Change, Monthly, USA
Chart: dynamics of hourly pay, United States.

Retail sales disappoint. The labor market is fine, we see the increase of regular posts by about 200 thousand (except in the most recent report); However, what the Fed currently focuses on is the hourly wage dynamics that should be the factor that strengthens the US currency.

In Europe, the situation presents itself differently. Inflation pressure is present. Although the recent reading of the CPI base inflation was 0.9%, the previous ones fluctuated around 1.2. The visible improvement has taken place in the IPC index. Last year was below zero, while now it is 1.4%; In March and February, readings have reached the highest levels since February 2013.

The improvement in this field is clearly one of the reasons for a stronger common currency. The euro zone has left behind the period of deflation, which occurred in 2015 and 2016, as a result of sharp declines in the energy resources market during 2014-2015. The euro has started to gain recently, probably due to the wave of gossip about the rapid normalization of monetary policy of the European Central Bank. It has been known for some time that the ECB has no intention of tightening its monetary policy (by reducing percentage rates or buying assets at a higher level than the current one).

Mario Draghi’s last press conference has proved to be the most pessimistic, in which no mention was made of the acceleration of the normalization of monetary policy; However, as soon as “Mario and his band” start sending bullish signals, the euro will gain value.

Graph: base inflation and IPCA, euro area, source: Bloomberg.

Looking at the CFTC reports, it is clear that the speculative net position on the euro has begun to take positive values. The number of short positions has been reduced from 103.4 thousand (30.05) to 85.2 thousand (13.06). The amount of “longs” increases steadily. The EUR/USD continues to rise since the beginning of the year. Increases in the EUR/USD since the beginning of the year can be explained by a simultaneous decline in a net dollar summary position.

Chart: speculative net position of EUR and EUR / USD, source: Bloomberg, TMS Brokers
Chart: summary of the net position in USD and the dollar index.

In a 6-hour chart, the EURUSD has shown a downward correction. We are still on a bullish trend, even though the consolidation period (1.13-1.11) is going on over time, which may generate a greater risk of going low. The current bearish movement has been halted by the two significant levels of internal setbacks (23.6 and 38.2). Decreases have reached the size of the previous correction. This has created a support field, which can become a difficult barrier to overcome, so the EURUSD can once again attack the 1.13 level that is currently the key level (pre-election peaks).

The break will open upward path, where the closest barrier will be the trend line drawn through the peaks of August 2015 and May 2016. An alternative scenario are the drops, while the selling signal will be the breach of the level of 1.11, which has been defending itself for a while. If this occurs, the course may reach the level of 1.0870-1.0850.

Chart: EUR / USD H6
Chart: EUR / USD H6
Chart: EUR / USD D1

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