The EUR/USD Conversion Shows Possible Bearish Exhaustion Bar, French IP Data Contributes to EUR Weakness
The sharp reversal seen in EUR/USD over the past 24 hours has changed the outlook for the pair.
The EUR/USD spiked higher to 1.1295 on Wednesday morning after the news of a Donald Trump victory as per the text book rule that Clinton = good for the Dollar and Trump = bad for the Dollar.
The gains in the Euro came about as US stock markets fell as much of the markets are funded in Euros.
However, the move was short-lived as investors recalibrated their views on Trump and bought stocks heavily.
The Euro was therefore sold off and the EUR to USD exchange rate subsequently slid back down in the 1.09s at the level the pair was at just before voting began on Tuesday.
Follow-through market action takes the pair back to 1.0895 on Thursday morning with november lows towards 1.0850 coming into view.
The rapid repricing of a December interest rate at the US Federal Reserve has helped the Dollar to extend gains as analysts agree that only disorderly financial markets following the vote would have blown the Fed off course.
"We continue to expect the Fed to move rates higher in December. The odds are lower as uncertainty is higher, but the near-term impacts on growth and inflation are small absent a sustained financial market shock. Any risk to the Fed outlook is to the path of policy in 2017 and 2018," says Drew T. Matus at UBS.
For the Euro, the outlook is less clear, but there are many who will fear the precedents set by Brexit and Trump could see a equally surprising populist/nationalist backlash in Europe.
With elections in four major EU members in 2017 this could threaten the very fabric of the EU, and stands to put heavy pressure on its currency.
Technicals: Long spike Bar could be a Bearish Sign
Neatly chiming with the bearish fundamental outlook for the pair is the long exhaustion bar which seems to have formed on the pair’s daily price chart.
Whilst it is not a perfect set-up, the bar lessens the chances of further upside and tilts the probabilities in favour of more downside.
Note the MACD indicator is also cresting bearishly.
It’s quite possible, therefore, that a move below the 1.0931 lows, confirmed by a break below 1.0915 could open the way down to the next target at the 1.0845 lows.
According to Eric Theoret at Scotiabank, EUR is now flirting with a clear break through 1.09 with risk to the late October low around 1.0850, the March low around 1.0820, and the 2016 low just above 1.07.
"Momentum signals are shifting in a bearish manner and DMI’s are providing confirmation. We look to near-term resistance at 1.0950," says Theoret.
The analyst notes EUR underperformance in response to disappointing industrial production figures from France and Italy as being complicit in allowing the EUR/USD to trade through 1.09 to fresh November lows.
"Downside risk is elevated as we look to relative central bank policy and the firming prospect of divergence between a dovish ECB and what appears to be an increased likelihood of a December Fed rate hike. Interest rate differentials are widening and the 2Y Germany-U.S," says Theoret.
