Fed Speakers Urge Interest Rate Caution Allowing EUR/USD To Crack 1.19

Highlights:

  • DXY slides further on Euro’s remarkable run above 1.19, USD showing promise against others
  • EUR strength could travel as political risks subside, and economic data continues to surprise
  • Crude oil price retrace Tuesday’s drop on EIA demand picture
  • Sentiment Highlight: Euro likely to hit further highs as retail fights trend

Should we be focusing on a Dollar bear market or a EUR bull market? It is not an easy question to answer. In one sense, a lot appears to be going wrong for the USD in 2017 despite the rally in US equity markets. Year to date, the DXY is lower by more than 9% and is falling across the board when compared to 16 major currencies. It is unusual for the USD to fall against developing and emerging markets, but that is the environment we find ourselves in and appears to be playing a helping hand in easing financial conditions globally. One last point of note, and possibly the most worrisome for USD Bulls is that if the DXY were to slip into a bear market, history shows that the dollar does not shake off sharp declines quickly. Per Bloomberg, a trade-weighted dollar gauge used by the Fed tends to show decade long bear markets, where the USD fell by ~40% during the previous cycles, once from 1985-1995 and again from 2002-2011.

Here’s a quick fun fact, since the US election in November, the Dow has crossed above four 1,000-point increment markets from 19,000 to 22,000. This accounts to a $ 700B increase in total DJIA market cap and the move from 21,000 to 22,000 is the seventh fasted thousand point surge (though a smaller percentage increase) in the Dow Jones’ history.

For all the disappointing news for DXY Bulls in 2017, the EUR bulls have nearly the opposite experience. The EUR has seen an appreciation against its G-10 peers and the overtaking of 1.19 on Wednesday against the USD puts it amazingly close to the closing high of 2015 that was reached on the first trading day of 2015 at 1.1995. Most of the focus has been on the abating political risk in Europe and the rise in economic performance. On Monday, I shared the OECD’s finding that the EUR was nearly 14% undervalued to the USD when looked at from the lenses of the purchasing power parity model. Such a normalization would take EUR/USD toward mid-1.30s.

Another thing to keep an eye on is EUR/JPY (chart below). EUR/JPY has crossed above the 200-Week MA. Since the founding of the single common currency, when EUR/JPY has crossed above the 200-WMA, there has followed significant EUR strength and JPY weakness, that aligned with the typical easy financial conditions like we currently see, and a further rise in risk assets like Emerging Market FX (EMFX).

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If there is one word that is music to the ears of Crude Oil Bulls, it is demand. Per the EIA data on Wednesday, U.S. Gasoline demand hit a record high despite the fear of the electric car revolution that has crept into earnings reports and OPEC in recent months. US demand hit 9.84m bpd last week, the highest level since 1990. While Crude inventories fell by 1.53m barrels, the expectations of a 3.1m draw left Crude Bulls unsatisfied. Another point of discouragement was that US imports of Saudi Arabian crude took another jump with a 0.24m barrel increase over the week to 1.174mbd. While the weaker USD that we touched on earlier could support the crude price alongside demand, traders will likely be anxiously watching the weekly high of $ 50.40 to be surmounted before getting too excited. A break above $ 50.40 would open a move toward $ 52 for WTI, which would be meet the late-May high.

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FX Closing Bell Top Chart: Weekly EUR/JPY above the 200-WMA could show a shift is upon us

Fed Speakers Urge Interest Rate Caution Allowing EUR/USD To Crack 1.19

Chart Created by Tyler Yell, CMT

Next Week’s Main Event:GBP Bank of England Rate Decision (AUG 03)

IG Client Sentiment Highlight:Euro Likely to Hit Further Highs as Retail Fights Trend

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

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EURUSD: Retail trader data shows 25.2% of traders are net-long with the ratio of traders short to long at 2.96 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06707; theprice has moved 10.5% higher since then. The number of traders net-long is 10.7% higher than yesterday and 14.8% higher from last week, while the number of traders net-short is 1.4% higher than yesterday and 6.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. We’ve seen a slowdown in selling, but there would need to be a much more substantial swing in sentiment before we could call for a meaningful EURUSD turnaround.(Emphasis added)

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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