EUR/USD, EUR/JPY Coil into Symmetrical Triangles Ahead of Eurozone PMIs, Jackson Hole
Top FX Headlines Talking Points:
- The Euro hasn’t gotten a lot of attention recently as traders have been distracted by Brexit and the US-China trade war. That could soon change as the September ECB meeting comes into focus.
- Overnight index swaps are currently pricing in a 100% chance of a 10-bps rate cut at the September ECB meeting, while there is an 89% chance of 20-bps of rate cuts by the end of 2019.
- The IG Client Sentiment Index suggest that more sideways trading is due ahead before directional moves unfold in the EUR-crosses.
The Euro hasn’t gotten a lot of attention recently as traders have been distracted by Brexit and the US-China trade war. That could soon change as the September ECB meeting comes into focus – largely thanks to the Federal Reserve’s annual Economic Policy Symposium in Jackson Hole, Wyoming.
European Central Bank President Mario Draghi won't be present, but remarks from the ECB's Sabine Lautenschläger, Benoît Cœuré, and Philip Lane over the coming days are very likely to confirm market speculation that the ECB will join the chorus of central banks lowering rates to combat collateral damage from the US-China trade war.
PRELIMINARY AUGUST PMI READINGS DUE ON THURSDAY
Eurozone economic data releases have been minimal thus far this week, but there are significant events due over the next 24-hours. The preliminary August French, German, and Eurozone PMI surveys due on Thursday will likely shape the tone that the ECB's Sabine Lautenschläger, Benoît Cœuré, and Philip Lane deploy at the Fed’s Jackson Hole Economic Policy Symposium.
After all, with markets essentially discounting a coin flip’s chance of three rate cuts by the end of the year, every piece of data leading up to the September ECB meeting will be closely scrutinized. The forecast of 51.2 for the headline Eurozone Composite PMI would mark another shift lower in growth momentum, down from the 51.5 reading seen in July.
Eurozone Economic Data Remains Disappointing
The past several weeks have produced disappointment on the Eurozone economic data front, at least when trying to take a look at economic data from an objective point of view. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is currently at -60.3; one month ago, it was at -8.5. The disappointing streak of Eurozone data has come alongside rising growth concerns elsewhere, mainly surrounding the US-China trade war and uncertainty over the global growth environment.
Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (August 2018 to August 2019) (Chart 1)
Outgoing ECB President Mario Draghi’s preferred measure of inflation, the 5y5y inflation swap forwards, are currently trading at 1.251%, slightly lower than where they were one month earlier at 1.289%, but still significantly above the yearly low set on June 17 at 1.141%. Regardless; these are market readings that will reinforce speculation for more easing from the ECB soon.
September ECB Meeting Should Start Rate Cut Cycle
When ECB officials speak in Jackson Hole, Wyoming over the coming days, traders should anticipate a strong dovish tone; anything less than a firm stance biased towards easing will surprise market participants. According to separate Bloomberg News and Reuters surveys, economists believe that the ECB will begin its rate cut cycle anew in September, in line with what rates markets are currently pricing.
European Central Bank Interest Rate Expectations (August 21, 2019) (Table 1)
Overnight index swaps are currently pricing in a 100% chance of a 10-bps rate cut at the September ECB meeting. There is a 69% chance of a second 10-bps rate cut coming in October, while there is an 89% chance of the second 10-bps of rate cut at the December ECB meeting. Rates markets are pricing a third rate cut over the next 12-months coming in January 2020. It’s important to note that marketing pricing generally dictates that the ECB will only act on rates at meetings when it has a new SEP; although that is a relic of the Draghi-led Governing Council, which could change once Christine Lagarde is the new chief.
EURUSD TECHNICAL ANALYSIS: DAILY TIMEFRAME (JUNE 2016 TO AUGUST 2019) (CHART 2)
Despite EURUSD hitting a fresh yearly low on August 1, it now appears that the pair is attempting to consolidate in a symmetrical triangle following the break of the downtrend from the June and July swing highs. Needless to say, in a symmetrical triangle pattern, the bias is neutral as momentum is flat. Price has yet to close through the July 9/July 17 swing lows around 1.1203, so it’s too soon to say that the symmetrical triangle is not part of a continuation effort to new lows rather than a bottoming attempt. Traders will want to keep an eye on the charts over the next week for a breakout opportunity in EURUSD.
IG Client Sentiment Index: EURUSD Price Forecast (August 21, 2019) (Chart 3)
EURUSD: Retail trader data shows 65.0% of traders are net-long with the ratio of traders long to short at 1.86 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1366; price has moved 2.3% lower since then. The number of traders net-long is 2.6% lower than yesterday and 19.9% higher from last week, while the number of traders net-short is 1.1% higher than yesterday and 18.1% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
EURJPY TECHNICAL ANALYSIS: WEEKLY TIMEFRAME (2008 TO 2019) (CHART 4)
With the weekly timeframe suggesting a loss of triangle support and recent swing support at the January 2019 Japanese Yen flash-crash low at 118.82, we may be witnessing the early phases of what could be a long-term downtrend for EURJPY.
EURJPY TECHNICAL ANALYSIS: DAILY TIMEFRAME (JUNE 2018 TO AUGUST 2019) (CHART 5)
When we last checked in on EURJPY it was noted that “with the weekly timeframe clearly exhibiting overt bearish momentum, the recent break low looks more ominous on the daily timeframe…as long as EURJPY prices are below the daily 8-, 13-, and 21-EMA envelope while both daily MACD and Slow Stochastics trend lower in bearish territory and below their neutral line, respectively, the path of least resistance will remain to the downside.”
Now, EURJPY has coiled in a symmetrical triangle since the start of August, suggesting that traders are simply taking a breather after such a significant move to the downside. Even as momentum indicators like daily MACD and Slow Stochastics have recovered ground, price has not; EURUSD appears to be digesting ‘oversold’ momentum. Like EURUSD, traders will want to keep an eye on the EURJPY charts over the next week for a breakout opportunity.
IG Client Sentiment Index: EURJPY Price Forecast (August 21, 2019) (Chart 6)
EURJPY: Retail trader data shows 66.5% of traders are net-long with the ratio of traders long to short at 1.99 to 1. In fact, traders have remained net-long since Apr 25 when EURJPY traded near 125.277; price has moved 5.7% lower since then. The number of traders net-long is 2.5% higher than yesterday and 26.8% higher from last week, while the number of traders net-short is 7.4% higher than yesterday and 0.4% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURJPY prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EURJPY trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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