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EUR/USD Outlook Mired by Opening Range Amid Failed Test of August High

EUR/USD Outlook Mired by Opening Range Amid Failed Test of August High

2020-01-08 01:00:00
David Song, Currency Strategist
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EUR/USD Rate Talking Points

The 2020 opening range for EUR/USD raises the scope for a further decline in the exchange rate as the near-term correction fails to produce a test of the August high (1.1250).

EUR/USD Outlook Mired by Opening Range Amid Failed Test of August High

EUR/USD continues to pullback from the December high (1.1239) even though the Euro Zone Consumer Price Index (CPI) climbs to 1.3% from 1.0% per annum in November, and the data may do little to influence the monetary policy outlook as the development was largely drive by higher energy prices.

The European Central Bank (ECB) may blame transitory factors for the uptick in the CPI as the core rate of inflation holding steady at 1.3% for the second consecutive month, and the Governing Council may keep the door open to further insulate the monetary union as the central bank “stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

Image of European Central Bank interest rates

In turn, the Euro may face headwinds ahead of the next ECB meeting on January 23 as the central bank expands its balance sheet by EUR 20B/month, and President Christine Lagarde and Co. may continue to endorse a dovish forward guidance in 2020 as “the risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside.”

It remains to be seen if the ECB will change its tune over the coming months as the central bank conducts a strategic review for the first time since 2003, and the Governing Council may continue to call upon European lawmakers to support the economy as the central bank insists that “governments with fiscal space should be ready to act in an effective and timely manner.”

Nevertheless, the ECB may continue to respond to the ongoing shift in US trade policy as the Office of the US Trade Representative (USTR) insists that France’s Digital Services Tax is “unreasonable,” with the Trump administration looking to implement “additional duties of up to 100 percent on certain products of France.”

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As a result, the threat of a US-EU trade war may drag on the Euro as the ECB relies on non-standard measures to achieve its one and only mandate for price stability, and the opening range for 2020 raises the scope for a further decline in EUR/USD as the near-term correction in the exchange rate fails to produce a test of the August high (1.1250).

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • The broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • As a result, the opening range for 2020 casts a bearish outlook for EUR/USD as the exchange rate pulls back from the December high (1.1239), and the correction from the 2019 low (1.0879) may continue to unravel amid the failed attempt to test the August high (1.1250).
  • Need a close below 1.1140 (78.6% expansion) to open up the 1.1100 (78.6% expansion) handle, with the next area of interest coming in around 1.1040 (61.8% expansion).
  • Will keep a close eye on the Relative Strength Index (RSI) as it continues to track the bullish formation carried over from the previous month, but a break of trendline support may foreshadow a further decline in EUR/USD as the bullish momentum abates.
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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