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Euro Forecast: On Weak Footing as November Winds Down; No ECB Rate Cuts Due

Euro Forecast: On Weak Footing as November Winds Down; No ECB Rate Cuts Due

Christopher Vecchio, CFA, Senior Strategist

Euro Forecast Overview:

  • Given the expected low participation rates and depressed trading volumes around the US Thanksgiving holiday, it seems unlikely that the market environment will cater to high volatility in EUR/JPY or EUR/USD rates.
  • The Euro has lost modest ground thus far in November, even as ECB rate cut expectations have evaporated for the next 12-months.
  • Per the IG Client Sentiment Index, EUR/JPY and EUR/USD have mixed outlooks for the coming days.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

Euro Runs Behind Majors in November

The Euro has had a forgettable November. Gaining ground thus far only against the Canadian Dollar (EUR/CAD 1.11% month-to-date), the Euro has seen modest losses accrue versus the other major currencies.

Thanks to receding concerns around a no-deal, hard Brexit and signs of progress towards a US-China trade war Phase 1 deal, pairs like EUR/NZD (-1.73%), EUR/GBP (-0.79%) and EUR/USD (-0.55%) have all pulled back in recent weeks. It’s doubtful that the Euro stages a meaningful recovery before the month is over.

Eurozone Economic Data Has Artificially Turned

The forex economic calendar has produced little meaningful data over the past few days, although the preliminary November German and Eurozone inflation reports (consumer price indexes) are due at the end of the week. Nevertheless, despite the light data flow, economic data momentum has continued to improve as weaker readings from the summer months roll off the trailing three-month lookback window. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is at -15.5, up from -52.3 on October 29.

Eurozone Inflation Expectations Depart from Brent Oil

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 the headline Eurozone inflation readingsdue later this week are expected to come in soft. According to a Bloomberg News survey, the preliminary November Eurozone inflation report is due in at 0.9% y/y versus 0.7% y/ypreviously, and the core is due to remain weak as well, at 1.2% y/y from 1.1% y/y.

Eurozone Inflation Expectations versus Brent Oil Prices: Daily Timeframe (November 2018 to November 2019) (Chart 1)

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The relationship between Eurozone 5y5y inflation swap forwards and Brent oil prices has relaxed over the past few weeks. The current 20-day correlation between Eurozone inflation expectations and Brent oil prices has weakened to -0.21 from 0.67 one month ago on October 29.

ECB Rate Cut Expectations Remain Soft

New ECB President Christine Lagarde is using the early months of her tenure to try and clear divisions among ECB Governing Council members. The schism exists as a result of former ECB President Mario Draghi ramming through his easing package at the September ECB meeting. As policymakers search for a new consensus, it seems likely that the ECB will remain on the sidelines for the time being.

European Central Bank Interest Rate Expectations (November 26, 2019) (Table 1)

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According to Eurozone overnight index swaps, traders are convinced that the period of recalibration by new ECB President Lagarde will take several months: there is only a 17% chance of a rate move through March 2020. Accordingly, there are still no rates moves discounted through October 2020; now, there is a 44% chance of 10-bps rate cut in October 2020 as well as a 7% chance of a 10-bps rate hike.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (NOVEMBER 2018 to NOVEMBER 2019 INTRADAY) (CHART 2)

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In our last EUR/USD rate forecast technical analysis update, it was noted that “it still holds more weakness may be on tap for EUR/USD.” EUR/USD rates have moved nowhere fast, and the rebound experienced mid-month has since faded. EUR/USD rates are effectively at the same levels they were two weeks ago.

To this end, bearish momentum has started to accelerate once more. EUR/USD rates are below their daily 5-, 8-, 13-, and 21-EMA envelope, which has aligned in bearish sequential order. Daily MACD is trending lower into bearish territory while Slow Stochastics have continued to move towards oversold territory. A break of the November low at 1.0989 may see EUR/USD continue to decline towards the early-September lows near 1.0926.

IG Client Sentiment Index: EUR/USD Rate Forecast (November 26, 2019) (Chart 3)

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EUR/USD: Retail trader data shows 56.94% of traders are net-long with the ratio of traders long to short at 1.32 to 1. The number of traders net-long is 3.84% higher than yesterday and 10.76% higher from last week, while the number of traders net-short is 1.74% higher than yesterday and 14.67% 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 (NOVEMBER 2018 to NOVEMBER 2019 INTRADAY) (CHART 4)

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The bearish breakout scenario examined in our last EUR/JPY rate forecast technical analysis update failed to gain traction, although EUR/JPY rates have not moved in a meaningful direction at all. If the correct perspective is that of a bull flag or a descending channel, it’s still the case that EUR/JPY rates are holding around the descending trendline from the September 2018 and April 2019 highs, and they are still below the 23.6% retracement of the 2018 high/2019 low range at 120.97.

EUR/JPY rates are attempting to generate bullish momentum, although momentum indicators remain mixed at this time. The daily 5-, 8-, 13-, and 21-EMA envelope is in no particular order. Daily MACD continues to decline in bullish territory, while Slow Stochastics is holding in bearish territory but just below the median line. Like for EUR/USD, the path of least resistance appears to be to the downside in the near-term for EUR/JPY – but we’ll need more evidence before a directional call is made.

Given the expected low participation rates and depressed trading volumes around the US Thanksgiving holiday, it seems unlikely that the market environment will cater to high volatility.

IG Client Sentiment Index: EUR/JPY Rate Forecast (November 26, 2019) (Chart 5)

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EUR/JPY: Retail trader data shows 47.98% of traders are net-long with the ratio of traders short to long at 1.08 to 1. The number of traders net-long is 3.95% higher than yesterday and 10.24% lower from last week, while the number of traders net-short is 14.99% higher than yesterday and 4.18% 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/JPY-bullish contrarian trading bias.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

Follow him in the DailyFX Real Time News feed and Twitter at @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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