The EUR/USD Exchange Rate Could go 'Well Below Parity' in 2017

Global forex markets are open for business and the Euro to Dollar exchange rate has slipped down to 1.0487. 

There is a sense 2017 will deliver some historical moves in the EUR/USD and all eyes remain on whether we are to witness a test of the solid support in the 1.04 region that has halted weakness on a number of occassions in December. 

Beyond here the big prize is 1.0.

Analyst Phil Seaton at LS Trader writes in a note seen by Pound Sterling Live that there is a "January effect in EUR/USD" which we should be aware of.

"There is a strong tendency for this market to post either its highest or lowest price of the year in January. Given that this is a key market and is largely impacted by the dollar, this will be an interesting pattern to monitor this month to see if it plays out. If it turns out that January is the high of the year in EUR/USD, we can expect this pair to go well below par before 2017 is up," says Seaton.

Seaton does however caution that seasonalities are only tendencies based on patterns mined from market data.

"They do not always work, and some are much more reliable than others. It’s good to be aware of such patterns but far better to follow the trends in real-time and trade accordingly," says Seaton.

Certainly a big driver in the pair at present is an insatiable demand for the US Dollar since Donald Trump won the US Presidency.

Sentiment has changed dramatically in the past 3 months with the Dow rising more than 9% and the Dollar Index rising over 8%.

"Investors typically look for corrections after such strong gains but there's hope that the Trump rally will turn into the Reagan rally which saw U.S. equities rise 32% from the time he was elected President to the end of his first term," says Kathy Lien, Director at BK Asset Management.

Under Reagan, the Dollar Index slipping 1.75% in the first week before a stronger rally that took the index up 10% by the end of President's first 100 days.

Near-term, we note the Euro to Dollar exchange rate’s short-covering rally appears to have run out of oomph and there is now a heightened probability of the downtrend resuming.

The EUR/USD's next move lower will however probably depend on tier one data out on Friday 6th for both currencies.

The Euro could be moved by inflation data, which if higher-than-expected, could indicate a change in monetary policy from the European Central Bank (ECB), could be on the horizon.

Such a change might involve a reduction in their current programme of money-printing which would be positive for the currency.

Of special interest to investors will be the release of the Eurozone's Core Inflation rate which has remained stubbornly locked at the 0.8% level for months.

A rise in core inflation would be a major sign of increasing activity in the region and lead to a boost for the Euro.

The US sees the release of two important metrics – the Non-Farm Payrolls (NFPs) report which measures the number of new jobs added to the economy in the last and ISM Manufacturing.

Whilst employment has become less of a concern to US policymakers given the unemployment rate has fallen to below the 5.0% ‘full-employment” threshold, a strong release above 170k in December would keep the Dollar well bid.

Of more importance, however, may be the Average Earnings data also released at the same time as NFPs.

Earnings fell marginally in November and a continued decline would be detrimental the Dollar as it would be a sign of falling inflation.

A rise, however, could boost the Dollar as it would be a positive sign of interest rates which tend to rise when people are earning and spending more.

Short-Term Technical Overview - 1.0305 next down-target

The pair has formed an extremely long and bearish-looking shooting star candlestick on the daily chart which bodes negative for the exchange rate in the short-term.

Shooting stars are Japanese candlesticks patterns which indicate a reversal from up to down.

They are formed when prices rise up sharply but then recoil from their peak just as rapidly.

Given the overall trend is still down the shooting star indicates a resumption of this downtrend.

For confirmation of more downside, we would be seeking a break below the 1.0350 lows to a target at 1.0305.

Above the 1.0350 lows there is a possibility the exchange rate might start to range trade as momentum, indicated by the MACD in the lower panel, is not bearish.

Data, Events to Watch for the Euro

As already mentioned, the main release for the Euro in the week ahead is Inflation data on Wednesday, January 3.

The Headline result is expected to rise substantially to 1.0% from 0.6% previously, but the Core result is the more important in many ways.

A rise in Core inflation above the expected 0.8% could provide a backdraft for the Euro, as it will show surprising movement in Core prices.  

German Inflation data on Tuesday, January 2 could provide a head’s up for the Euro-wide result on the next day, and any rise in Core German prices may move the single currency higher.

Tier two data consists of Manufacturing and Services PMI for December, out on Monday (Manu) at 9.00 (GMT) and is expected to rise to 54.9 from 53.7 previously.

Services PMI out on Wednesday, meanwhile, is expected to fall to 53.1 from 53.8 previously.

Economic and Business Sentiment data is out at 10.00 on Friday, January 5.

Data, Events to Watch for the Dollar

As already mentioned the main release for the Dollar in the next five days is Non-Farm Payrolls (NFPs) released at 13.30 (GMT) on Friday, January 6, which are forecast to show a slight dip to 175k from 178k previously.

Any result above the 170 mark is likely to support the Dollar as it will show continued strength in the already strong labour market.

Average Hourly Earnings are released at the same time as NFPs and will probably attract a lot of attention.

Last month they contracted surprisingly by -0.1% but in December they are expected to rise by 0.3%.

A further contraction, however, will result in a pull-back for the Dollar.

ISM Manufacturing is released at 15.00 (GMT)on Tuesday, January 3, and is expected to rise to 53.5 from 53.2 previously.

Markit Manufacturing PMI is also released on Tuesday at 14.45.

A big release are the FOMC minutes on Wednesday at 19.00.

ISM Non-Manufacturing, is released at 15.00 on Wednesday, January 4 as well.