EUR/USD's Bottoming Effort, EUR/JPY's Bullish Triangle Breakout Continue
Euro Forecast Overview:
- The Euro’s strong start to the month and the final quarter of 2019 has continued through the ides of October. With Brexit on a path to resolution, EUR/GBP has been the only EUR-cross trading in negative territory month-to-date, down by -2.51% at the time of writing.
- Overnight index swaps are currently pricing in an 80% chance of no change in rates at the October ECB meeting. Overall, there is a 65% chance of no change in rates by the end of the year.
- Per the IG Client Sentiment Index, EUR/USD gains may continue to build.
See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.
Euro’s Strong Start to October and Q4’19 Continues
The Euro’s strong start to the month and the final quarter of 2019 has continued through the ides of October. With Brexit on a path to resolution, EUR/GBP has been the only EUR-cross trading in negative territory month-to-date, down by -2.51% at the time of writing.
Otherwise, gains remain plentiful and have continued to accumulate versus the trio of safe haven currencies: EUR/JPY is now the top performer in October and Q4’19 thus far, adding 1.8%; EUR/CHF is up by 1.21%; and EUR/USD, despite progress on the US-China trade war front, has added 1.11%. It still holds that the Euro’s gains are coming at a time when traders’ collective attention has turned back to Brexit and the US-China trade war.
Eurozone Finance Ministers Start Rainy Day Fund
One of the more significant tailwinds for the Euro over the past week has been news of a that a “rainy day fund” has been started by Eurogroup finance ministers. The fiscal stabilization fund will be used in the event of future crises. While the Eurozone is still not a true fiscal union, the “rainy day fund” is a step in a direction of making the Eurozone more sustainable over time. The ECB may not be the only game in town for much longer; fiscal authorities are waking up to the realities of needing to ‘do more.’
Eurozone Inflation Expectations Tracking Brent Oil Closely
The only other item of interest on the Eurozone economic calendar the remainder of the week comes on Wednesday, October 16, when the final September Eurozone inflation report (consumer price index) will be released. Given the state of Eurozone 5y5y inflation swap forwards – a medium-term market-derived measure of inflation expectations – it shouldn’t be a surprise that consensus forecasts are looking for headline Eurozone inflation to have eased further in September, from 1% to 0.9%, while core inflation is due on hold at 1% (y/y).
Outgoing ECB President Mario Draghi’s preferred measure of inflation, the Eurozone 5y5y inflation swap forwards, currently are trading at 1.210%, comfortably above the yearly low set last week on October 3 at 1.115%. Eurozone inflation expectations continue to trend lower overall, however: Eurozone 5y5y inflation swap forwards read 1.305% one month ago on September 17.
Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (October 2018 to October 2019) (Chart 1)
The relationship between Eurozone 5y5y inflation swap forwards and Brent oil prices has tightened up over the past few weeks. The current 20-day correlation between Eurozone inflation expectations and Brent oil prices has strengthened considerably to 0.86; one month ago, on September 17 the 20-day correlation was 0.50.
Eurozone Economic Data Remains Weak
After the disappointing October German ZEW survey today and the final September Eurozone inflation report, the Eurozone economic calendar takes a backburner for most of the remainder of the week. Overall, when trying to look at economic data from an objective point of view, it’s clear that Eurozone economic data has continued to disappoint over the past few months. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is down to -71.6 today from -26.1 one-month ago on September 17 and -8.8 on July 16.
When Will the ECB Cut Rates?
European Central Bank rate cut odds have continued to ease as the calendar has turned through the ides of October, largely due to perceived progress on the Brexit and US-China trade war fronts. According to overnight index swaps, market participants are currently discounting an 80% chance of no policy change at the October ECB meeting; there is a 20% chance of a 10-bps rate hike. But having just previously cut interest rates last month, it seems highly unlikely that the ECB would reverse course in such quick order.
European Central Bank Interest Rate Expectations (October 15, 2019) (Table 1)
Nevertheless, it still holds that ECB rate cut expectations are dissipating: two months ago, there was a 70% chance of a 10-bps rate cut and a 29% chance of a hold; now there is a 80% chance of a hold. Rates markets do expect more action from the ECB in the first half of 2020, although the timing has been pushed back by a month: ata 68% chance, April 2020 is now favored for the next ECB rate cut.
EUR/USD Rate versus COT Net Non-Commercial Positioning: Daily Timeframe (October 2018 to October 2019) (Chart 2)
Looking at positioning, according to the CFTC’s COT report for the week ended October 8, speculators increased their net-short Euro positions from 66K to 75.4K contracts. While there has been a sharp building in short positioning, the Euro has been able to trade to the topside – evidence of resiliency, a bullish sign for the future. If short saturation in the futures market is proving ineffective at weighing the Euro down, a short covering rally may be around the corner.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (OCTOBER 2018 to OCTOBER 2019 INTRADAY) (CHART 3)
Between the end of August and the end of September, a range formed 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, EUR/USD has cleared the descending trendline from the June, July, and September highs, and support has been established at the daily 8-EMA, suggesting that a turn in price action has occurred. EUR/USD rates are above the daily 8-, 13-, and 21-EMA envelope, while Slow Stochastics have reached overbought territory. Meanwhile, daily MACD continues to climb back towards its signal line.
The technical picture is offering more evidence that a false bearish breakout has occurred below 1.0926. False breakouts typically yield reversals back to the other side of the consolidation. As previously noted, in this case, “EUR/USD 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: EUR/USD Rate Forecast (October 15, 2019) (Chart 4)
EUR/USD: Retail trader data shows 51.8% of traders are net-long with the ratio of traders long to short at 1.08 to 1. The number of traders net-long is 0.4% higher than yesterday and 10.8% lower from last week, while the number of traders net-short is 10.3% lower than yesterday and 6.1% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (OCTOBER 2018 to OCTOBER 2019 INTRADAY) (CHART 5)
Sharp reversals in recent days has altered the EUR/JPY technical picture in a material way. The short-term symmetrical triangle in place going back to the mid-July swing high did not yield a continuation effort to the downside. Instead, now that EUR/JPY rates are comfortably above the daily 8-, 13-, and 21-EMA envelope ( which is in bullish sequential order) while daily MACD rises through its signal line and Slow Stochastics holds in overbought territory, the near-term path of least resistance is higher. A close above the September high at 120.07 opens up airspace for a return back towards the descending trendline from the September 2018 and April 2019 highs near 121.00 over the coming sessions.
IG Client Sentiment Index: EUR/JPY Rate Forecast (October 15, 2019) (Chart 6)
EUR/JPY: Retail trader data shows 48.6% of traders are net-long with the ratio of traders short to long at 1.06 to 1. The number of traders net-long is 6.4% lower than yesterday and 21.0% lower from last week, while the number of traders net-short is 8.3% lower than yesterday and 15.5% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
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