What’s Happening?

EURUSD has been crushed since the US election but in recent weeks has stabilized. An attempt to rebound in late December has unravelled and the Euro is back testing its recent lows which could end in confirmation of a base forming or another big breakdown. There is a lot of big data announcements due this week including PMI and employment numbers for the US and Germany which could have a big impact on monetary policy speculation and forex trading.

Technicals:

Since the US election, EURUSD has been hammered down from near $1.1300 toward $1.0360 with the relentless rise of the US Dollar mowing down everything in its path. Over the last three weeks the Euro has started to build a base with $1.0360 support holding through several tests.

A recent rally up toward $1.0650 abruptly failed near a 23% Fibonacci retracement and short of its 50-day average. The pair has been knocked back under $1.0500 and back toward $1.0360 where a test could end in a big breakdown and the start of a new downleg or a triple bottom. Initial resistance on a rebound may appear near $1.0440 or $1.0500.

A break through the floor which has been forming would be a significant technical event, signalling the start of a new downleg that could test a measured $1.0220 initially and possibly be drawn toward a test of the $1.0000 round number at par.

 

Fundamentals

The recent selloff in EURUSD has been driven by European and US factors and both sides could influence trading in the pair this week.

The USD has been soaring since the election on speculation that new policies from the incoming Trump Administration including tax cuts, reduced regulation, and increased infrastructure spending would boost the US economy. It has also been speculated that these moves could increase inflation, forcing the Fed to accelerate its monetary normalization program and raise interest rates more frequently.

In 2015 and 2016, the Fed raised interest rates once a year. Before the election, the street and the Fed had been thinking 2 rate hikes were likely for 2017. By the end of the year, the Fed was thinking three rate increases for this year while the street was pricing in four or even five.

This week’s FOMC minutes and US data could impact forecasts on the number of US rate hikes that are likely this year which could impact the US dollar and potentially spark a correction.

A sour outlook toward Europe in general has manifested itself in a weak EUR lately relative to USD and GBP. It’s looking to be a potentially volatile year for the continent with elections scheduled for France, Germany and the Netherlands along with the potential for political and/or economic turmoil in Italy, Greece and elsewhere, plus Brexit looming on the horizon.  

Because of this, traders have been anticipating that the European economy could struggle this year, keeping the ECB in the more dovish camp. This cautious approach was seen in December when President Draghi announced a one and done partial cut to QE purchases rather than a US style series of taperings toward zero. This week’s European data could indicate how much support the Eurozone economy needs. So far data out of Germany has been in-line (PMI) to better than expected (employment). Positive data could support EUR while disappointing data could maintain or increase downward pressure.

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