EURUSD Weekly Outlook: Resilient, Technically Bullish, However…
FX Traders’ weekly EURUSD fundamental & technical picture, this week’s market drivers that could change it- the bullish, the bearish and likely EURUSD direction.
The following is a partial summary of the conclusions from the fxempire.com weekly analysts’ meeting in which we cover the key lessons learned for the coming week and beyond.
Overview
- Technical Outlook: Bullish
- Fundamental Outlook Bearish: Russia, China Stoke Fear, Fed Stays The Course
- Top Calendar Events
- Conclusion: Weekly Outlook Neutral-Bullish
TECHNICAL OUTLOOK: Bullish
Here we look at the technical outlook for both overall risk appetite (which the pair usually tracks) and the pair itself. Despite the ominous headlines, overall risk appetite showed resilience and only modest dents, and the EURUSD was even more resilient, actually outperforming the indexes.
Overall Risk Appetite: Sample Global Weekly Chart & Key Take-Aways
Weekly Charts Of Large Cap Global Indexes With 10 Week/200 Day EMA In Red: LEFT COLUMN TOP TO BOTTOM: S&P 500, DJ 30, FTSE 100, MIDDLE: CAC 40, DJ EUR 50, DAX 30, RIGHT: HANG SENG, MSCI TAIWAN, NIKKEI 225
FOR S&P 500 AND DJ EUR 50 Weekly Chart October 2012 – Present: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
01 Mar. 15 19.58
Key Take-Aways
- Asia, Europe, and the US were all lower, with indexes closest to the epicenters of bad news, Ukraine and China, suffering the most.
- However most indexes remain within their multi-month trading ranges and mere percentage points from their all-time highs, so for all the headlines, markets remain calm and resilient.
EURUSD Weekly Technical Outlook: Even More Bullish
EURUSD Weekly Chart, 26 May 2013 – 14 March 2014
Weekly Charts Of Large Cap Global Indexes With 10 Week/200 Day EMA In Red: LEFT COLUMN TOP TO BOTTOM: S&P 500, DJ 30, FTSE 100, MIDDLE: CAC 40, DJ EUR 50, DAX 30, RIGHT: HANG SENG, MSCI TAIWAN, NIKKEI 225
KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
03 Mar. 15 23.24
Key Take-Aways
The EURUSD was even more resilient than the above gauges of overall risk appetite. It’s tracked the S&P 500 fairly closely recently, however last week it actually gained ground while the S&P 500 dropped 2%.
Note how the EURUSD closed the week at the upper edge of its double Bollinger band buy zone, suggesting this momentum is strong enough to trust for new longer term positions. That said, note how the pair has yet to do this twice in a row over the
Fundamental Outlook Bearish: Russia, China Stoke Fear, Fed Stays The Course
Events are supporting the USD’s safe haven appeal, and the Fed continues to inch towards tightening.
The Bearish
Crimea Succession Vote: How Much Damage To Follow?
The big questions aren’t about the likely referendum result (in favor of joining Russia) or whether sanction threats will follow, but rather:
- Will Russia take more territory by force (inviting local resistance and prolonged military activity) or will it settle for Crimea? If the Russians stick to Crimea:
- Do they annex Crimea immediately (inviting more sanctions)? Or…
- Do they take the extra time to add some appearance of fulfilling some of the “legal formalities” for the sake of appearances?
- There are only 2 choices in the referendum vote:
- Join Russia
- Restore the 1992 Crimean Constitution. Unfortunately it’s unclear what that means. It could either mean that Crimea will be an independent state or part of Ukraine depending upon whether the vote refers to the first or second version of 1992 Constitution.
The West has already deemed the election illegal, and there will be no independent outside observers or other measures insuring anything that the West would accept as a free and fair election. Thus the chances of a vote that the West accepts are minimal. The unanimous vote by the Crimean parliament tells us where any vote is likely to go. Even if the vote somehow goes against succession, Russian control of at least Crimea remains the likely outcome.
In sum, the vote is likely to be another step in escalating the crisis and further uncertainty to weigh on markets. That said, markets have not retreated that far and thus don’t see this spiraling into a new Cold War or worse.
- A Russian takeover of some or all of Ukraine is not an existential threat to the West at this time, nor is it likely Russia would want to go that far. Russian military escalation could push the already struggling Russian economy into a vicious recession if the West sharply curtailed economic relations. Putin’s actions are about keeping Russian access to warm water ports and for now he seems to be concentrating on achieving that specific goal.
- Europe’s dependence on Russia for a third of its natural gas (not quickly replaceable) means it won’t likely press for harsh sanctions that might invite a gas cutoff or other harsh countermeasures
- The US isn’t sending any material military aid at this time.
So the best result for markets would be some clarification that Russia doesn’t intend to take more than Crimea. That could prompt a relief rally.
FOMC Rate Decision Wednesday
Not only will it be the first led by Janet Yellen, the FOMC is virtually certain to cut another $10 bln from QE, affirm its intention to continue these cuts going forward (barring evidence of a prolonged slowdown in the US recovery) thus ending QE later this year. It is also expected to make major changes to forward guidance, dropping the 6.5% unemployment rate in favor a more vague redline for beginning actual interest rate increases.
While a fear driven flight to safety, there is also potential for the FOMC rate decision on Wednesday to spur appetite. This is one of the quarterly meetings whereby updated forecasts for growth, inflation and interest rates are due.
The Draghi Drag: ECB Concern About EUR Strength
ECB President Draghi’s concern about the EUR becoming too strong was arguably the biggest drag on the EUR this week. However we don’t expect him to do anything about it, given that the EZ’s improving growth data in Q4 2013 came in the midst of continued EUR appreciation against most other major currencies. A strong EUR has not yet proven to be enough of a negative to justify any ECB action against it. Instead, capital’s return to the region reinforces the growing confidence the region, and so carries a bullish tinge as well. We’ll expand on that a bit, below.
The Bullish
The only really bullish fundamental force for the EURUSD is net outflows out of the US as reported in eight of the past 12 international capital flows report (which was again negative this past week). Much of that continues to flow into the EUR. This trend won’t likely change due to short term EURUSD fluctuations, given that it’s fueled by long term exporter nation policy. That said, the above bearish events, combined with stocks remaining near their long term highs is a recipe for at least a pause if not pullback.
The EU recovery is at best weak ex-Germany, the EU crisis causes remain unfixed and the EU remains a fatally flawed currency zone sustained on spin control, debt, complacency. Hmmm, sounds familiar. While we’d never recommend shorting this rally until we see real evidence confirming that turn on the charts, we still think it’s amazing that those in charge of fx reserves would up their bets on the EUR for the longer term.
Top Calendar Events
Other than the Crimea vote (Sunday, with market response Monday-Tuesday) the responses it provokes, and the Fed rate statement, here are the other big drivers of overall risk appetite (which the EURUSD follows) and specific EURUSD drivers (consult any economic calendar for further details).
Monday
- EU CPI
Tuesday:
- EU: German ZEW survey
- US: Building permits, CPI, Housing starts
Wednesday
- US: FOMC quarterly economic projections, monthly rate statement and press conference
Thursday
- EU: EU economic summit: NB: the Ukraine crisis is not listed on the agenda, though that doesn’t mean it won’t come up in comments to the press.
- US: Existing home sales, Philly Fed manufacturing index
Sample Retail Trader Positioning
The chart below, a real time sample of nearly 500 retail traders, average holding period 7 weeks, remains little changed from last week(28% long vs. 24% at the start of last week), still heavily short the EURUSD, despite the entrenched EURUSD uptrend and mixed short term technical and fundamental picture.
EURUSD Sample Retail Trader Positioning January 6, 2014 To Present
Source: forexfactory.com
04 Mar. 16 00.11
CONCLUSION: Weekly Outlook Neutral-Bullish
From a fundamental perspective we were frankly surprised that the EURUSD closed higher this week, especially given the pullback in risk appetite as shown by our sample of global stock indexes that it usually follows, and especially of the S&P 500. If it happens again we’ll be even more surprised. Still, when the pair is in its double Bollinger band buy zone, the odds favor a move higher, especially given the close at the upper edge of the Bollinger bands, and the rarity of that happening twice.
Once again, the conflict between fundamentals and technical indicators leads us to stand aside and leave trading to the short term traders. A variety of both weekly and daily indicators (including MACD and EMAs) are also overall bullish.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.
