Daily analysis

Novox 11.12 Reference of Fx market

EURO LAGS MAJOR PEERS AS RISK APPETITE SURGES

While the US presidential election results are still not yet fully known, the suspected victory by Democrat Joe Biden has invigorated certain corners of the financial world. In particular, risky assets, including stocks, commodities, and growth-linked currencies have outperformed their peers. The Euro, however, cannot stake claim as a top performer.


In fact, over the past week, the Euro has outperformed only three other major currencies: the US Dollar, the Swiss Franc, and the Japanese Yen. The Euro’lagging performance alongside the low yieldingsafe haven currencies speaks to a host of issues plaguing the Euro right now, including rising COVID-19 caseloads, disappointing economic data, and a discouraging pace of fiscal stimulus.


ECB ON HOLD, BUT WATCHING EUR/USD RATE

While the ECB has no plans to act in the near-term, the US Dollar weakness (vis-à-vis the DXYIndexsince the US election has left ECB policymakers in an uncomfortable position. In September, the ECB’s Governing Council revised their 2019, 2020, and 2021 projections to suggest that they now anticipate euro dollar to trade at 1.18 over the next two years, up from their June forecast of 1.08.


A strong Euro could prove to be a significant impairment to the Eurozone’s recovery from the coronavirus pandemic. To this end, alongside enhanced euro dollar rate forecasts, The ECB has held steady or downgraded their growth and inflation forecasts for 2021 and 2022.


WHY DOES THIS MATTER FOR TRADERS?

The overwhelming narrative right now is that we are in a weak US Dollar environment. However the ECB, fully aware of the fragile recovery that they have on their hands, may not allow the Euro to rally too far lest it become a greater impediment to growth. As the largest component of the DXY Index, if the ECB signals that it is willing to be more aggressive on the easing front, then the US Dollar decline may not be as precipitous as many fear; there could be a ceiling on Euro gains.


EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (NOVEMBER 11, 2020) (CHART 1)


If the ECB does eventually act to cap Euro gains, then it seems less and less likely that the efforts will come vis-à-vis the interest rate channel. Earlier on Wednesday, November 11, ECB President Christine Lagarde said that “while all options are on the table, the pandemic emergency purchase program and targeted longer-term refinancing operations have proven their effectiveness. They are therefore likely to remain the main tools for adjusting our monetary policy.”


Accordingly, expectations for the European Central Bank to cut rates have continued their retreat, which has been gathering pace over the past week. According to Eurozone overnight index swaps, there is an 18% chance of a 10-bps interest rate cut by the end of 2020, down from 25% at the start of November. More starkly, as November began, March 2021 was favored with an implied probability of 59%; now, March 2021 has a 39% chance, and markets are favoring July 2021 with a 52% chance.


EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (JANUARY 2018 TO NOVEMBER 2020) (CHART 1)


The broader sideways range carved out since late-June remains in place, even as the tighter range dating back to July has seen both support and resistance temporarily broken. EUR/USD rates continue to bound around the downtrend from the 2008 and 2014 highs (from the all-time high). EUR/USD rates are intertwined among below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is holding at its signal line, while and Slow Stochastics have pulled back prior to reaching overbought territory. Momentum is lacking; the ranges hold.

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