Euro Forecast Overview:
- The forex economic calendar has been a minefield this week, not just for the Euro – but this is ‘more of the same’ for the Eurozone, which has continued to produce disappointing results over the past several weeks
- Overnight index swaps are currently pricing in a 11% chance of a 10-bps rate cut at the October ECB meeting. There is a 39% chance of a second 10-bps rate cut coming at the December ECB meeting.
- The IG Client Sentiment Index suggest that EURJPY and EURUSD may head in opposite directions.
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The Euro is taking advantage of a weaker US Dollar, but that doesn’t mean it’s ‘all steam ahead’ for the single currency. Surging global growth concerns on the back of weaker PMI readings across developed and emerging market economies come amid signs that a no-deal, hard Brexit may be still in the cards as the US-China trade war looks set to heat up. While the Euro has been dealing with its own smorgasbord of issues, attention has seemingly turned elsewhere for the time being.
Eurozone Economic Data Remains Disappointing
The forex economic calendar has been a minefield this week, not just for the Euro. Eurozone PMI readings for September fell across the board, with more evidence of a recession coming. September Eurozone inflation came in below estimates as well. In sum, this is ‘more of the same’ for the Eurozone, which has continued to produce disappointing results over the past several weeks, 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 down to -69.3today, from -31.8 one-month ago on August 9; three-months ago on July3, it was -2.6.
Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (October 2018 to October 2019) (Chart 1)
Outgoing ECB President Mario Draghi’s preferred measure of inflation, the 5y5y inflation swap forwards, are currently trading at 1.155%, lower than where they were one week ago at 1.215% and one month earlier at 1.205% - and now barely above the yearly low set on June 17 at 1.141%. Global growth concerns, backed by disappointing global PMI readings and weak realized inflation readings, continue to drive inflation expectations; this is not an issue unique to the Euro.
ECB Rate Cut Cycle Under Way
Considering the tone deployed by ECB President Mario Draghi in recent weeks, especially after the September ECB meeting, it seems very likely that the door remains open for more rate cuts. Indeed, interest rate markets are still pricing in more easing over the coming months.
European Central Bank Interest Rate Expectations (October 2, 2019) (Table 1)
Overnight index swaps are currently pricing in a 11% chance of a 10-bps rate cut at the October ECB meeting. There is a 39% chance of a second 10-bps rate cut coming at the December ECB meeting. By the time January 2020 rolls around, markets are anticipating more action: there is a 59% chance of a move at the first meeting of next year.
EURUSD RATE TECHNICAL ANALYSIS: DAILY CHART (October 2018 TO October 2019) (CHART 2)
In our last EURUSD technical forecast update, it was noted that “We’re now seeing a range form for EURUSD between 1.0926 and 1.1110.” A brief dip outside of the range occurred at the end of September and start of October, but channel support was found dating back to the August and November 2018 lows (as well as the descending trendline from the January and April 2019 swing highs). Now, EURUSD rates are attempting to base off of channel support for the third time in the past month.
To this end, it is possible that a false bearish breakout has occurred below 1.0926. False breakouts typically yield reversals back to the other side of the consolidation: in this case, EURUSD would be looking for a return towards the prior range high near 1.1110. A move above this level would suggest that a meaningful bottom has been found in EURUSD rates.
IG Client Sentiment Index: EURUSD RATE Forecast (October 2, 2019) (Chart 3)
EURUSD: Retail trader data shows 70.1% of traders are net-long with the ratio of traders long to short at 2.34 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1195; price has moved 2.1% lower since then. The number of traders net-long is 10.1% lower than yesterday and 14.9% higher from last week, while the number of traders net-short is 11.4% higher than yesterday and 20.4% 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 RATE TECHNICAL ANALYSIS: DAILY CHART (October 2018 TO October 2019) (CHART 4)
In our last EURJPY technical forecast update, it was noted that “EURJPY rates continue to hang around the 61.8% Fibonacci extension of the September 2018 high to January 2019 low to March 2019 at 118.67. Importantly, the descending trendline from the September 2018 and March 2019 highs has yet to be breached to the topside suggesting that longer-term bearish inclinations persist... The uptrend from the intramonth swing lows has been broken; the path of least resistance is now lower for EURJPY.” We’ve seen those bearish tendencies take control of EURJPY price action in recent days.
EURJPY is continues to trade below its daily 8-, 13-, and 21-EMA envelope, which is now aligned in bearish sequential order. Both daily MACD and Slow Stochastics are below their respective signal and median lines, with the latter holding in oversold territory. Now that the September 12 bullish outside engulfing bar low at 117.56 is slipping away, more downside pressure is likely to build.
EURJPY RATE TECHNICAL ANALYSIS: DAILY CHART (October 2018 TO October 2019) (CHART 5)
As noted at the start of September, it’s important to take a longer-term point of view for EURJPY rates. Big picture: we may be witnessing the early phases of what could be a long-term downtrend for EURJPY with the weekly timeframe suggesting a loss of triangle support from the 2012 and 2016 lows and recent swing support at the January 2019 Japanese Yen flash-crash low at 118.82. The near-term target remains the 2017 low at 114.85. More aggressively, the 100% Fibonacci extension September 2018 high to January 2019 low to March 2019 high move targets 113.21.
IG Client Sentiment Index: EURJPY Rate Forecast (October 2, 2019) (Chart 6)
EURJPY: Retail trader data shows 53.7% of traders are net-long with the ratio of traders long to short at 1.16 to 1. In fact, traders have remained net-long since April 25 when EURJPY traded near 124.49; price has moved 5.6% lower since then. The number of traders net-long is 12.4% lower than yesterday and 0.8% higher from last week, while the number of traders net-short is 18.1% higher than yesterday and 9.9% 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
To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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