EUR/USD Reversal Gathers Pace; EUR/JPY Maintains Flag


Euro Forecast Overview:

  • One month ago, there was a 39% chance of seeing rates dropped by 10-bps at the December ECB meeting; today, there is a 0% chance, according to overnight index swaps. Rates markets are expecting a quiet ECB for the foreseeable future: there are no rate moves discounted through October 2020.
  • EUR/USD has been under renewed pressure in recent days, while EUR/JPY has continued to hold within its sideways consolidation from mid-October.
  • Per the IG Client Sentiment Index, EUR/JPY and EUR/USD may trade sideways in the coming sessions.

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

Euro Has Had a Mediocre Start to November

The Euro has had trouble finding its footing in November. Over the past week, only two EUR-crosses have gained ground (EUR/GBP is up 0.12% and EUR/JPY has added 0.23% at the time of writing), while the other five have all reversed course from their October highs meaningfully.

With global equity markets buoyed by US-China trade war headlines, the commodity currencies have done quite well since the start of the month: EUR/AUD is down by -0.85%; and EUR/CAD has fallen by -0.74%. Similarly, receding Federal Reserve interest rate cut odds have helped EUR/USD pullback, down by -0.80% thus far in November.

Eurozone Economic Data Has Been Improving

The forex economic calendar has been light for the Euro in recent days, not atypical once we make it past the first few days of the month. Overall, Eurozone economic data has been steadily improving over the past few weeks, at least when trying to measure releases relative to expectations. The Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, is at -27.7, from -79 on October 10 and -53 on August 8.

ECB Rate Cut Expectations Evaporate

There has been a good deal of pushback around the ECB in recent weeks, insofar as calls for less monetary stimulus and more fiscal stimulus (cough, Germany) have dominated the news wires. With new ECB President Christine Lagarde seeking to clear divisions among ECB Governing Council members – a result of former ECB President Mario Draghi ramming through his easing package at the September ECB meeting – it seems likely that the ECB will be sitting on its hands for the time being.

European Central Bank Interest Rate Expectations (November 7, 2019) (Table 1)

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According to overnight index swaps, the chance of an ECB rate cut over the next 12-months has been steadily declining since the October ECB meeting.One month ago, there was a 39% chance of seeing rates dropped by 10-bps at the December ECB meeting; today, there is a 0% chance, according to overnight index swaps. Rates markets are expecting a quiet ECB for the foreseeable future: there are no rate moves discounted through October 2020.

Eurozone Inflation Expectations Lag Brent Oil

We haven’t heard from new ECB Christine Lagarde yet, so for now, we’ll continue to track former ECB President Draghi’s preferred measure of inflation, the Eurozone 5y5y inflation swap forwards.The Eurozone 5y5y inflation swap forwards are currently trading at 1.269%, comfortably above the yearly low set at the start of October at 1.115%. Eurozone inflation expectations have continued to stabilize in recent weeks: one month ago, on October 10, Eurozone 5y5y inflation swap forwards registered 1.162%.

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 deteriorated, from 0.81 one month ago to 0.46 today. Given the state of recovery in Eurozone 5y5y inflation swap forwards – a medium-term market-derived measure of inflation expectations – it seems highly likely that new ECB President Lagarde will stay away from any additional monetary stimulus during her first few months at the helm of the Governing Council.

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

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After consolidating in an ascending triangle pattern in the second half of October, EUR/USD rates have failed to make an upside advance, and instead, are now looking at a potential bearish reversal situation. The uptrend from the October intramonth lows has been broken, and it’s coming against a backdrop where US Treasury yields are rising thanks in part to Federal Reserve rate cut expectations receding.

It’s no longer the case that a meaningful bottom has been established.EUR/USD has now fallen below its daily 5-, 8-, 13-, and 21-EMA envelope, which is starting to align in bearish sequential order. Daily MACD has started to trend lower (albeit in bullish territory), while Slow Stochastics have quickly crashed into oversold territory. The path of least resistance appears to be to the downside in the near-term.

IG Client Sentiment Index: EUR/USD Rate Forecast (November 7, 2019) (Chart 3)

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EUR/USD: Retail trader data shows 49.57% of traders are net-long with the ratio of traders short to long at 1.02 to 1. The number of traders net-long is 2.30% lower than yesterday and 27.29% higher from last week, while the number of traders net-short is 8.21% higher than yesterday and 5.90% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (NOVEMBER 2018 to NOVEMBER 2019 INTRADAY) (CHART 4)

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In the interim period since the last EUR/JPY rate technical forecast update, not much has changed on the technical side: weakness in the Euro has been offset by weakness in the Japanese Yen (EUR/USD is lower and USD/JPY is higher). The EUR/JPY rally in October has been tempered around the descending trendline from the September 2018 and April 2019 highs, as well as the 23.6% retracement of the 2018 high/2019 low range at 120.97.

EUR/JPY rates are enmeshed in the daily 5-, 8-, 13-, and 21-EMA envelope (which is in neither bearish nor bullish sequential order). Daily MACD has recent issued a sell signal, although it remains well-above its signal line. Slow Stochastics have pulled back towards its median line, further evidence of flat momentum. Traders may want for the recent two-week range to break prior to any decisions.

IG Client Sentiment Index: EUR/JPY Rate Forecast (November 7, 2019) (Chart 5)

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EUR/JPY: Retail trader data shows 39.36% of traders are net-long with the ratio of traders short to long at 1.54 to 1. The number of traders net-long is 6.92% lower than yesterday and 6.47% higher from last week, while the number of traders net-short is 7.69% lower than yesterday and 1.33% 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. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse lower despite the fact traders remain net-short.

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



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