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What is Fueling the Euro's Strongest Run In 5 Years and Can it Last?

What is Fueling the Euro's Strongest Run In 5 Years and Can it Last?

2018-08-29 03:24:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • An equally-weighted index of major Euro crosses has advanced for 10 consecutive sessions - the longest run since December 2012
  • Such an incredible climb for the Euro contrasts the general state of fundamentals supporting the second most liquid currency
  • It is good trade practice to highlight options for different outcomes; and for the Euro, I like: EURUSD, EURJPY, EURGBP

See how retail traders are positioning in the EURUSD, EURJPY and EURGBP as well as other FX majors, other global indices, gold and oil intradayusing the DailyFX speculative positioning data on the sentiment page.

Euro Posts a Remarkable Run That is Even More Impressive in Relief

The daily chart of EURUSD is nothing short of impressive. This benchmark exchange rate just weeks ago produced a high-profile bearish break below 1.1500 which in turn signaled the potential closure to a 12 month long reversal pattern. The pair had carved out a head-and-shoulders pattern which established support on multiple tests of a sloping trendline that eventually gave way to bearish pressure towards the beginning of the month. With the slide below this well-established floor, the market seemed to signal a lasting reversal of trend for which there was plenty of build up that could subsequently be retraced by a motivated speculative rank. Instead, the charged move stalled soon after traders' attentions were piqued. After the effort stalled, a reversal soon set in to fully undermine technical traders' ambitions. This move was certainly spurred on by the Dollar's slide, but the Euro contributed heavily to the reversal as well. Looking to an equally-weighted Euro index in fact, the single currency has advanced for 10 consecutive trading days on through Tuesday's close. That is the longest bullish run seen from this particular currency since December of 2012.

Equally-Weighted Euro Index

As Persistent as the Market Is, Fundamentals Offer Limited Support

There is no doubting the persistence of the Euro's climb, but the actual progress made is far less remarkable than the daily tally. A look at the technical picture for the index shows the currency far from multi-year highs that could draw the same degree of speculative appeal as the EURUSD itself had earned. And, of course, an equally-weighted index is not itself tradable. The disparity of intent is even more substantial when we consider the fundamental aspects behind the currency. Where is the advantage for the Euro when projecting relative value? Growth certainly does not present a superior pace for the Euro-area relative to the US, UK or Asian economies. In monetary policy, there has been a significant charge in anticipation for the first ECB rate hike - a theme that earned considerable appreciation through 2017. Yet, this outlook has been significantly discounted, risks have risen for hawkish intent across the board and the market is far more selective of its risk exposure. As for the more recent influence of trade wars, the US and EU presidents agreed not to pursue tariffs against each other so long as they were negotiating. However, there is a proxy influence being exacted by the United States' application of sanctions on countries Europe has vested considerable money and diplomatic capital into (including Iran and Turkey). Political stability is another factor that is growing in breadth from stability of the Trump administration to Brexit to Australia's Prime Minister being replaced. The Euro-area is no different in facing risks. Most prominent is the tension leveraged by Italy which has pushed back against budget restraints and threatened to veto the budget altogether on immigration issues. How far can the Euro rise in spite of these uncertainties?

Monetary Policy Standings

Options for Alternative Scenarios

It is always a good habit to have scenarios and trading options for various scenarios. We do our due diligence in order to come to the most probable outcome for the market which in turn sets the foundation for trade setups. However, if we are certain of a particular bearing for the market, we are only deluding ourselves. There is certitude to be found in the collective bias and speculation of so many market participants. Acknowledging probabilities makes us more rational traders that are less likely to hold fast through scenario that falls apart and to have the presence of mind to consider alternative outcomes for which a different trade approach could prove fruitful. For the Euro, the combination of the technical stretch, the conditions of the broader market (trends are difficult to sustain) and the fundamental gap we've opened up; I favor an approach that fades the currency's strength. Amongst the major crosses, the EURGBP is perhaps one of the more remarkable outlets for a bearish view. Where we could attribute Brexit concerns as a unique catalyst for the Sterling slide, the same them bodes poorly for the Euro as well. For the EURJPY and EURCHF present another fundamental benefit should the shared currency slide: safe haven appeal. Where the Dollar is an absolute liquidity option, the Yen and Franc are more practical through intermediate aversion to risk. Alternatively, if the Euro continues to gain, there may be no more appropriate outlet than EURUSD. The pair has breached a significant round of technical restraints, and the Dollar is one the most at-risk majors through the medium-term. We focus on the Euro in today's Quick Take video.

Daily Chart of EURJPY

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