EUR/USD Rate Eyes Advance to 1.1034

The EURUSD conversion continues to move higher as the effects of the ECB's underwhelming December policy meeting continue to be felt.

After a large short squeeze on Thursday, following disappointment from the European Central Bank (ECB), EUR/USD is still exhibiting some volatility.

In the long term, the EUR is expected to slide lower as a result of US divergence policy and economic challenges that still persist in the European Union (EU).

However, in the short term we are still seeing remnants of last week’s ECB policy decision.

ANZ Research cautions that while the ECB policy decision provided a lot of noise markets could be accused of over reacting. 

Has anything actually fundamentally changed?

“The Fed continues to inch towards policy normalisation and the extension of the EU QE program will still take the ECB’ s balance sheet to about 35% of GDP over the coming 15 months (roughly EUR3.7trn)," say ANZ, "this liquidity will still help support a world coping with USD liquidity reduction, leaving EUR/USD under pressure, and NZD/EUR supported."

However, it is argued the ECB experience does hold some lessons for markets going into the first Fed hike since 2006.

“Clearly market positioning is becoming more influential, and the ability of markets to absorb changes in view is limited. This suggests that next week’s FOMC meeting – which is fully priced – has risks of a counter consensus USD reaction to a Fed hike,” say ANZ.

On Friday December 4, the markets switched its focus to US non-farm employment and that figure did not disappoint.

If there was once last data piece missing to cement a December rate hike, it was this strong US November job report.

The US added 211,000 non-farm jobs last month, the unemployment rate was held at seven and a half year low of 5.0%, and September and October employment data was revised to show 35,000 more jobs than previously reported.

Over the last few weeks, we have seen the rhetoric from members of the Federal Open Market Committee (FOMC) change from a debate of whether or not to raise interest rates to the emphasis of gradual rate hikes.

How steep the rate of ascent by interest rates is now becoming an important question for the USD's valuation and many analysts reckon that the curve is too shallow to support any further major USD appreciation.

EUR/USD Trend Is Still Lower As Divergent Policy Paths Continue

Regardless of the ECB upset, the EUR/USD trend is still lower as it’s hard to fight divergent policy paths.

As mentioned above, fundamentals have not been altered and as the dust settles, normal pressure and support points will re-emerge.

This week, the markets will look towards production figures in Germany and the Sentix investor confidence index for the eurozone. In both cases, there could be upside sentiment.

On the US front, first inflation rates in the form of import and producer prices and retail sales data will be released.

Due to the continued oil glut, a decline in US import prices is expected; this will largely offset the base effect and the rise in annual inflation should be small. Weak inflationary pressure should play on producer prices.

We will continue to see the US headline inflation rate swayed by energy prices and service prices, which have been weak.

US retail sales are expected to be influenced by lower energy prices and auto sales should see a slight rise.

Chance for Further Advances

From Commerzbank: “EUR/USD charted an inside day on Friday, attempting to absorb the massive rally from the day before.

“There is scope for a further advance to the 1.1034 200 day ma and even the 1.1087/97 September low and 28th October high.

"Key resistance remains the 1.1228/17 2014-2015 downtrend and 55 week ma and while capped here the market will remain in a longer term down move.

“Recommended trade: Add 1.0825, stop 1.0750. Partially cover 1.1035 and exit the remainder 1.1075.”

Late on Friday European Central Bank President Mario Draghi spoke in New York but his attempts to fix a surge in the Euro with new dovish comments had little impact.

A day earlier the Euro set its biggest one-day gain in six years, appreciating by some 4 percent against the US dollar after the ECB’s stimulus injection disappointed currency markets.

In the weeks leading up to the ECB’s event risk on December 03 Draghi had primed markets for a much more aggressive package of interest rate cuts and QE.

The Euro gained by 3 percent against Sterling last week.