Euro Outlook: EUR Exchange Rates Faces Action at ECB as Early as February
- Written by: Gary Howes
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The volatility in emerging markets continues to put pressure on the euro. The currency experienced its largest one-day loss this year and the outlook sees the euro dollar closing in on the key 1.35 level.
A look at the markets on Friday morning shows the EUR is recovering ground against a number of currencies, however pressure vs the US dollar remains:
- The euro dollar dollar exchange rate (EUR/USD) is unchanged at 1.3555.
- The euro pound exchange rate (EUR/GBP) is 0.09 pct lower at 0.8230.
- The euro Australian dollar (EUR/AUD) is 0.36 pct higher at 1.5471.
- The euro Canadian dollar exchange rate (EUR/CAD) is 0.25 pct higher at 1.5164.
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Update 1): EUR under fresh pressure on soft inflation data.
Update 2): Deutsche Bank: "The trough in inflation remains uncertain. The risk is the tough is lower than expected and a downside surprise gets embedded into weaker inflation expectations. In our opinion, the set of data to emerge over the last month justifies a further easing of the policy stance on 6 February. It is a question of timing. If not February, the easing will be in March, accompanying downwardly revised ECB staff inflation forecasts." - Mark Wall at Deutsche Bank.
Data released at 10AM GMT confirms Eurozone inflation continues to fall. Markets are betting on some form of stimulatory tone from the ECB next week to the detriment of the EUR.
Consumer Price Index (YoY) (Jan) came in at 0.7%, below expectations for 0.9% and below the previous month's 0.8%. Consumer Price Index - Core (YoY) (Jan) is now at 0.8% vs a previous 0.7%.
Good news on Unemployment Rate (Dec) though which came in at 12% vs 12.1% expected and unchanged on the previous month.
Concerns over Emerging Market financials will likely persist for some time yet, so readers are urged to keep an eye on the Turkish Lira, South African Rand and Brazilian Real when considering the euro.
The shared currency also failed to find support from inflation data released yesterday: "consumer prices dropped 0.6%, driving the annualised pace of CPI growth down to 1.3% from 1.4%. This is a sign that low inflation remains a big problem for the European Central Bank," says Kathy Lien at BK Asset Management.
Jean-Pierre Dore at Western Union believes traders are looking ahead to next week’s ECB meeting where Draghi is expected to strike a dovish tone which should put further pressure on the euro:
"The euro may be coming to a tipping point as fundamental data, technical data, and European Central Bank (ECB) murmurs all point to an increasingly bearish outlook going forward. This morning’s consumer price index (CPI) data from Germany was weak and put further support behind those anticipating a dovish tone to set by the ECB next Thursday.
"On the technical front, EUR/USD is testing is 100-day moving average and if it closes below that level on a weekly basis (1.3600) we may see a continued fall in the euro going forward. Furthermore, interest rate differentials are increasingly favouring the USD, which only adds to the case for EUR bulls to proceed with caution."
Outlook for the euro: Things could be turning a lot more bearish
Recent price action across the euro exchange rate complex, and particularly against the euro, has seen technical analysts shift their short-term outlook on the euro.
"Things could be about to turn a lot more bearish for the euro as it attempts to break below a couple of significant levels of support. The first is the ascending trend line, which dates back to 6 September. The pair has respected this level on a number of occasions, including yesterday, but today we’re seeing the first attempt at a break below it," says Craig Erlam at Alpari.
According to Erlam, just below here we have the 61.8 fib level, which the pair failed to close below, despite numerous attempts, a couple of weeks ago. A break below both of these should start the next phase of euro selling, with the next target being 1.34.
This has previously been a significant level of support and resistance on numerous occasions and Alpari reckon we will see this again.
Commenting further, Erlam says:
"Just below here we also have the 200-day SMA, around 1.3370. If the pair fails to close below the trend line, which is very possible given that the pair has erased most of its losses in the last half an hour or so and there’s still plenty of time to go on both the 4-hour and daily charts, it could actually become quite bullish in the very short term.
"Although this would not change my short to medium term bearish view. All this means is that following such an aggressive sell-off yesterday, we may see a small correction in the pair. If this is the case, the marabuzo line of yesterday’s candle will be key.
"A failure to break above this would be quite bearish and could prompt another assault on the trend line, while a daily close above this would result in a piercing pattern which is typically bullish, although it requires a confirmation candle to support this. This would be a candle on Monday that closes above yesterday’s opening level."
