EUR/USD: from hope to disappointment

The single European currency continues to surprise, not bending under the influence of verbal interventions of the ECB and losing previous drivers of growth. According to Vice President of the European Central Bank Vitor Constancio, the current take-off of the EUR/USD is not justified from the fundamental point of view. The sluggish dynamics of inflation in December makes us talk about the need to maintain an ultra-soft monetary policy for a very long time. The head of the Bank of France, Francois Villeroy de Galhau, expressed concern over the rapid strengthening of the euro, and one of the main "hawks" of the Governing Council, Ewald Nowotny, said that the current dynamics of the single European currency creates obstacles to achieving the HCPI target of 2%.

Thus, the ECB's words on the possibility of revising the parameters of the quantitative easing program in the case of improving the eurozone economy's state should not to be taken as the driver of the EUR/USD growth. Even if the president of the Bundesbank, Jens Weidmann, says that QE will last until September, and rates will not be raised earlier than mid-2019, then what is the euro growing at? On the potential reduction in the volume of purchases of assets from €30 billion to €10-15 billion? It is doubtful that this will happen before inflation approaches 1.8%. Yes, oil can support consumer prices, however, when something similar happened in the past, Mario Draghi turned investors' attention on the weakness of core inflation.

What's the matter? Why does the market ignore the speeches of the FOMC spokespersons, calling for 3-4 acts of monetary tightening, an increase in the likelihood of a 3-fold hike in the federal funds rate in 2018 to 55%, strong macroeconomic data on US inflation, retail sales and industrial production? Restoration of the latter, incidentally, allows you to count on the continuation of the rally of major US stock indices.

Dynamics of the Dow Jones and Industrial Production Index

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Source: Zero Hedge.

Perhaps the reason lies in the risk of a potential shutdown in the government after January 19? In my opinion, this is not so. At the end of 2017, concerns over the inability of the tax reform to pass Congress has exerted pressure on the dollar, but as soon as they were dispelled, the "bears" for the EUR/USD could not derive any benefit from this.

The main culprit for the current weakness of the "greenback" is its failure from last year. Optimistic forecasts in early 2017 gave way to complete disappointment at the end. The USD index lost about 10%, which was not a result of internal data or actions of the Fed, but to the successes of the currencies of other countries. In the end, the actual GDP data turned out to be better than the estimates, and the Fed raised rates not twice but 3 times. At the moment, the situation is reversed by 180 degrees, and there is a certain risk that history will repeat itself: excessive optimism about the bright future of the euro will turn into disappointment.

Technically, much will depend on the ability of the "bears" for the EUR/USD to maintain the level of 1,225. It turns out - the probability of a correction in the direction of 1.21 will increase. No - the initiative will pass to the "bulls", ready to continue the rally in the direction of 1.244 (161.8% in the pattern AB = CD).

EUR/USD, daily chart

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Risk appetite defines the main trends

Eurozone

Consumer prices in the eurozone rose by 1.4% in 2017, as evidenced by the final data of Eurostat, published on Wednesday. The result was slightly lower than the level of November (+ 1.5%), but it coincided with the forecasts, and therefore did not have a noticeable effect on the fluctuations of the euro.

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A little later, a member of the Board of Governors of the ECB, Ewald Nowotny, commenting on the confident dynamics of the euro, said that its strengthening was not useful. According to Nowotny, the regulator does not have any specific target at the euro rate, and therefore will simply follow the developments.

Despite neutral comments, the ECB is obviously concerned about the growth of the euro against the backdrop of a tightening of the Fed's policy. From the dynamics of events, one can make a simple conclusion that if the ECB starts its own tightening program, the euro will react to it with an even more confident growth that will look nonsense against the background of a growing spread of yields in favor of the dollar.

The euro has formed a local high, and will now, most likely, decline in the technical correction. The nearest resistance at 1.2092 is the level of the previous high, the next is 1.1916, if it survives, the chances of resuming growth will remain high.

United Kingdom

Slowing consumer inflation did not spare the UK, which happened for the first time in six months. The annual growth in 2017 was 3.0%, which is slightly lower than 3.1% a month earlier, when the highest price growth was registered in five years. The result coincided with the forecasts, but the pound reacted with confident growth, because, in addition to macroeconomic indicators, several political parameters played in its favor.

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It is unclear who initiated the discussion of the idea of a repeat vote on Brexit, but it is clear that European officials liked this idea. The head of the EU, Donald Tusk responded first, saying that the desire of the British to remain in the European Union will be met with the approval of European politicians.

A little later, European Commission President Jean-Claude Juncker went even further by announcing that he hoped for the return of Great Britain to the European Union after it left the bloc next year.

Meanwhile, by the end of March an agreement on the transition period must be concluded. British banks, according to Reuters, are preparing to move their operations to the territory of the EU, if the agreement is not reached. This will be a compulsory measure, as banks may lose the ability to serve customers from the EU due to changes in legislation. If this threat is realized, it will have a negative impact on the pound rate, as part of the investment flows will be deployed from the UK to the European continent.

The pound in the meantime completely declined after Brexit, coming close to level 1.40. The pound is supported by external factors, in particular, the rise in commodity prices and the general weakness of the dollar. Until the end of the week the upward momentum will push the pound up a possible correction to 1.3720 or 1.3612 players will use for new buying.

Oil

Oil is trading near the three-year highs, close to the level of $ 70/bpd. The number of long speculative contracts on BRENT on the New York Stock Exchange (NYMEX), according to the latest report of the CFTC, also reached three-year highs, according to WTI the situation is even clearer - the long-term odds are the highest for the whole history of observations, that is, since 2006.

Oil is supported by several factors at the same time - a tough OPEC + position, which leads to market balancing, the obvious weakness of the US shale sector, which, despite the growth of quotations, does not return investments so far, as well as a worldwide trend towards growing interest in risk. In the current conditions, it is not necessary to expect a full turn, the risk of decline to 67.95 exists, but it is highly likely to be used for new purchases.

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Global macro overview for 18/01/2018

The Bank of Canada hiked the overnight rate from 1.00% to 1.25% yesterday, just as expected by the market consensus. This interest rate hike was previously priced in by market at 90%. In the BoC Rate Statement, the bank stressed that the economic situation justifies further increases, but high private indebtedness and growing concerns about the future of NAFTA agreement are the main factors to slow down the rate of normalization. Therefore, this rate hike was very familiar to last Bank of England interest rate hike, which was a "dovish" and conditional hike.

There is no question that the Canadian economy, in general, has improved significantly on field of the retail sales, GDP growth, CPI, and employment activity over the last couple of months, nevertheless the BoC had more options than to raise interest rates immediately such as signaling plans to tighten in March – a "hawkish" hold. It will be very interesting to watch the BoC decision next time as there is still a possibility of a cut if the economic conditions worsen.

Let's now take a look at the USD/CAD technical picture at the H4 time frame. After an initial spike, the market reversed back to the consolidation zone and it still sits there today. None of the important levels was violated and the momentum has switched to neutral. The nearest technical support is seen at the level of 1.2350 and the nearest technical resistance is seen at the level of 1.2556.

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Global macro overview for 18/01/2018

The recent ECB comments regarding the further interest rate hike has left a lot of the traders confused. The period of easy EUR/USD gains has just ended and market participants are returning to the tactical field survey. On the one hand, the market remains convinced that it is right and believes that the ECB will end the QE in September, and then soon pass interest rate hikes. However, the central bank itself does not want the EUR to quickly reflect those expectations (which may be met), because excessive appreciation will dismiss this scenario if it harms the inflation areas. The ECB confirmed with various channels yesterday that there will be no change in the message at the next week's meeting. Regarding the dovishness of President Draghi, it might not be surprised if in the statement ECB will dissipate any optimism about the economic situation in order to the fears of the strength of the euro and to extinguish the rally of the currency. The medium-term portfolio capital continues to prefer EUR appreciation, but now it may wait for a move back to 1.2100 zones. Daytraders, however, have a shorter investment horizon and after an unsuccessful attempt to break the price over 1.23, they may now be tempted to reverse their position. Another cautious comment of ECB members and new "leaks" or rumors are not out of the question, so it will be better to prepare for more increased volatility and more price swings.

Let's now take a look at the EUR/USD technical picture at the H4 time frame. The market has hit the level of 1.2321 and pulled-back with three 120 pips swings. It looks like it is being traded inside of a descending channel, just above the technical support at the level of 1.2193. If the channel resistance will hold, the next technical support is seen at the level of 1.2150.

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Fundamental Analysis of EUR/GBP for January 18, 2018

EUR/GBP has been impulsive with retracements recently inside the tight corrective structure above the support area of 0.8750. Due to recent positive economic reports on the GBP side, EUR has been struggling to keep up with the mixed economic reports to push the price higher. Today, the UK RICS House Price Balance report was published with a significant increase to 8% in value from the previous value of 0% which was expected to be negative at -1%. The positive economic report provided GBP with the required pressure to sustain the recent gain against EUR that is expected to continue further. On the EUR side, today German Buba President Weidmann spoke about the interest rates and monetary policies. His speech was quite neutral in nature and was not enough to support the EUR gains against GBP. As for the current scenario, GBP has turned the table suddenly inside the volatile and corrective structure. GBP is expected to dominate further in the coming days until the eurozone provides better than expected economic reports or events, signalling further notable economic recovery in the long term.

Now let us look at the technical chart. The price is currently residing below the dynamic level of 20 EMA after a recently bounce off the trend line resistance at 0.89 area. The price action squeeze is currently signaling a bearish pressure which is more probable to break below it in the coming days to head much lower below the 0.8750 area with a target towards 0.8550. As the price remains below 0.8900, which is the trend line resistance, the bearish pressure is expected to continue further.

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