The Euro / Dollar Rate Tipped to Extend Decline as Channel Breakout Identified
The Euro to Dollar exchange rate (EUR/USD) has turned lower once more having broken out of a rising channel.
From a technical perspective this break is a strongly bearish sign which indicates more downside is probably on the horizon.
The exchange rate has pierced the bottom border of a rising channel and such a breakdown indicates a high probability that it will continue lower.
Channel breakouts generate an expected target which is the same distance below the break (y) as the height of the channel above (x).
Calculated on EUR/USD this produces a downside target at roughly 1.0605.
This is also just above the supportive 50-day MA enhancing its validity as a target.
MACD has crossed its zero line producing a mildly bearish signal.
To ensure a greater probability of success we advocate waiting for downside confirmation, signalled by a break below the lows at 1.0641.
Despite there being a dearth of economic data out for the Euro in the remainder of the week the focus will instead be on political drivers.
European political developments in France, the Netherlands and Germany, where elections are scheduled to be held this year could influence the currency’s movements.
There is a general election in the Netherlands on March 15 in which the anti-EU Freedom Party (PVV) is expected to get the most votes (31% at last poll) but not enough for a majority rule.
In France, presidential elections take place in the spring with concerns that nationalist Marine Le Pen could win – although she is unlikely to win an outright victory according to current polls.
Elections in Germany in the autumn may see Angela Merkel lose according to recent polls, adding to the fear factor surrounding the breaking up of the EU and the rise of nationalism in Europe.
Investors need to bear in mind that polls are often inaccurate in predicting election outcomes especially in recent elections in the UK and US where the candidate expected to win from early polling was not that which eventually won.
The more extreme politics involved can make respondents reticent when interviewed by pollsters because they fear being branded racist if they admit supporting a far-right anti-EU party.
The high number of wavering undecideds in both elections also tended to end up siding with the more extreme choice, especially in the UK Brexit referendum.
As such the unthinkable is possible.
US Data
On Thursday, we have commentary from Fed official James Bullard, although his comments may be of limited impact as he is not a voting member of the FOMC.
Import and Export price indices and the Michigan Sentiment Survey are out on Friday, with the former at 13.30 and the later at 15.00 GMT.
Bullish Fundamentals
Valuation models posit fair-value at upwards of 1.30 suggesting the Euro is grossly undervalued.
According to UBS, this is due to the difference in growth and employment between the US and Eurozone, however, actual growth rates between the two have been broadly indistinguishable over the last two years as Eurozone growth has picked up whilst US growth – at least in recent weeks – appears to be stalling.
As such, fundamentals appear to support a bullish outlook and indicate the bearish technicals targeting 1.0605 could be describing no more than a pull-back followed by a probable resumption higher.
It, therefore, recommends caution on the part of traders wishing to capitalize on the bearish pullback.
