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EUR/USD Snaps Bearish Series Despite Dovish ECB; Inverse H&S in Play?

EUR/USD Snaps Bearish Series Despite Dovish ECB; Inverse H&S in Play?

2017-02-16 16:25:00
David Song, Strategist
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Talking Points:

- EUR/USD Snaps Bearish Series Despite Dovish ECB; Inverse H&S in Play?

- NZD/USD Struggles at Former-Support; New Zealand Retail Sales May Offer Little Relief.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.0671

1.0678

1.0591

70

87

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD may stage a larger recovery over the days ahead as it clears the recent series of lower highs & lows, and a break/close above the former-support zone around 1.0660 (50% expansion) to 1.0680 (78.6% expansion) may spur a move towards the monthly high (1.0829) as the pair largely tracks the broad range from late-2016; may see growing bets for an inverse head & shoulders as long as the pair hold above 1.0469 (38.2% expansion) to 1.0500 (50% expansion), but the broader outlook remains tilted to the downside as the European Central Bank (ECB) continues to carry out its quantitative easing (QE) program, while Fed Fund Futures continue to price a greater than 60% probability for a June rate-hike.
  • The ECB policy meeting minutes suggest the central bank is in no rush to move away from its easing-cycle as officials argue the ‘recent pick-up in inflation had been mainly driven by an increase in energy prices,’ and the Governing Council may keep the door open to further expand/extend its asset-purchase program as President Mario Draghi and Co. warn ‘‘recent encouraging developments in inflation expectations and the prospects for a sustained adjustment in inflation towards the Governing Council’s inflation aim could be put at risk. Therefore, the Governing Council was seen as well advised to remain patient and maintain a “steady hand” to provide stability and predictability in an environment that was still characterised by a high level of uncertainty.
  • The recent rhetoric suggests the ECB may increase its effort to ward off a ‘taper tantrum’ as the central bank is on course to reduce its asset-purchases to EUR 60B/month starting in April, and the committee may have little choice but to prolong its non-standard measures as ‘the balance of risks to the euro area outlook was considered to remain tilted to the downside, owing mainly to uncertainties surrounding the prospects for foreign demand growth.
  • Need a close above 1.0660 (50% expansion) to 1.0680 (78.6% expansion) to open up the next topside area of interest around 1.0780 (100% expansion) to 1.0790 (38.2% expansion) followed by the February high (1.0829).

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

NZD/USD

0.7222

0.7243

0.7206

1

37

NZD/USD Daily

NZD/USD Daily Chart

Chart - Created Using Trading View

  • NZD/USD stands at risk of giving back the advance from earlier this week as the pair struggles to push back above former-support around 0.7240 (61.8% retracement) to 0.7270 (78.6% retracement), with the broader outlook tilted to the downside as it appears to be conforming to the bearish trend carried over from the summer months; the near-term developments in the RSI also point to a further decline in the exchange rate as it responds to the bearish formation from July and pulls back from trendline resistance.
  • A 1.0% advance in New Zealand Retail Sales may spark a bullish reaction in the kiwi as it boosts the outlook for growth and inflation, but the data print may do little to alter the monetary policy outlook as the Reserve Bank of New Zealand (RBNZ) persistently warns ‘numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly;’ with Governor Graeme Wheeler schedule to step down in September, it seems as though the central bank will retain the status quo throughout the first-half of the year, but officials may toughen the verbal intervention on the local currency as they argue ‘a decline in the exchange rate is needed.
  • Will keep a close eye on the weekly range, with near-term support coming in around 0.7100 (38.2% expansion) to 0.7120 (50% retracement), but a break/close below the Fibonacci overlap may open up the next downside target around 0.7040 (50% retracement) to 0.7060 (38.2% retracement).

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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

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