EUR/USD: The EUR Bulls are Nervous that their Recovery May Never Come

Those who are betting on a recovery in the euro against the dollar on foreign exchange rate markets are getting worried that the single currency has lost its spark.

The euro is in decline against the dollar after what had been a stellar first half of February.

The rate maxed out at 1.1376 on the 11th of February, and we have seen seven consecutive days od decline.

Along the way the market was littered with speculators looking to buy back into EUR/USD having anticipated the bottom of what was assumed to be a breather in a more dominant trend higher.

One gets the sense that the euro bulls are in the proverbial 'last chance saloon.'

"Today is the day that the bulls need to show themselves. After 5 consecutive bear candles the price has drifted back to the support to close almost bang on the level last night. An intraday minor breach of $1.1085 has me nervously looking for support and it has come through on an intraday basis but this now needs to turn into a positive daily signal," says Richard Perry at Hantec Markets.

Perry remains confident on EUR/USD suggesting that daily technical signals are near term corrective but it is more of a drift correction rather than a big bearish move.

Joel Kruger, FX Strategist at LMAX Exchange warns that it’s important to recognise this latest round of Euro weakness could be a bit of a bear trap saying from a technical standpoint, while the rate holds above the previous 1.1000 breakout area, an assault on 1.1500 should not be ruled out.

Lloyds Bank's Robin Wilkin is however unconvinced by the single currency's ability to sustain levels above 1.11. The analyst says:

"We retain a downside bias, after the latest rally held key channel resistance around 1.1375.

"That said, in the near term the decline from 1.1375 is testing first support levels around 1.11 and while this area holds intra-day studies suggest a near-term rebound can develop.

"We are looking for a lower high to develop in the 1.1210-1.1250 region for a decline back to channel support in the 1.10-1.09 region, with a break there confirming a move back to 1.07/1.06 again."

US Dollar in 6th Day of Rises on Steady Fed

Whetting the appetite of those backing the US dollar was the mid-week release of US Industrial Production data followed by a confident assessment of the domestic and global economic situation expressed in the minutes for the January Federal Reserve Open Markets Committee meeting.

The minutes of the February FOMC meeting were keenly anticipated overnight as markets were eager to get a view on how the Federal Reserve was interpreting the massive stock market sell-off that has characterised 2016 thus far.

Downgrades appear to have been the order of the day the risks to the projection for inflation were seen as weighted to the downside.

The continued slide in oil prices and the stronger US dollar were cited as being drivers for the slight cut to inflation expectations.

Furthermore, while the Fed were happy with the current employment situation they viewed the risks to its outlook for the unemployment rate as skewed to the upside.

The risks to the forecast for real GDP were seen as tilted to the downside, reflecting the staff’s assessment that neither monetary nor fiscal policy was well positioned to help the economy withstand substantial adverse shocks.

But, the key takeaway is that the Federal Reserve is yet to be shaken, as was Janet Yellen when she appeared before the US Congress.

“While acknowledging the possible adverse effects of the tightening of financial conditions that had occurred, most policymakers thought that the extent to which tighter conditions would persist and what that might imply for the outlook were unclear, and they therefore judged that it was premature to alter appreciably their assessment of the medium-term economic out-look,” says Magne Ostnore at DNB Bank in Oslo.

Industrial Production Surges, Sentiment Towards USD Shifts

The big driver for the USD data-wise today was news that Industrial Production rose 0.9% m/m in January, well above consensus expectations for a 0.4% gain.

The upside surprise in January industrial production growth was relatively broad-based across industry groups.

Manufacturing production, which accounts for three-quarters of total US industrial output, rose 0.5% m/m (forecast: 0.2%).

Motor vehicle and parts production increased 2.8% on the month.

Dollar Boosted as Markets See Further Hikes

A growing sense that the Federal Reserve would stand back from raising interest rates this year has hurt  the US Dollar.

However, “the odds of at least one rate hike this year have shot up dramatically over the past few days, with a 34% chance of a move by December. This is a significant improvement from the mere 11% chance priced in as of last Friday,” notes Christopher Vecchio, Currency Analyst at Daily FX.

The reality is that the Fed is going to raise rates at least once this year, more than the market has been pricing in and the US dollar is rising accordingly.