Fundamentals
So, as usual, market has appeared to be wiser than any of us. Twice we've changed the context and twice market turned it 180 degrees by surprising impact on external factor which you have to be a prophet to predict, as these factors were outside of economy or technical analysis.
As Reuters reports, Friday turn has happened as worrisome political and economic news outside the United States drove a strong bid for the safety of the greenback.
The Chinese yuan fell after data showed China’s retail sales in November grew at the slowest pace since 2003 and industrial output marked its weakest growth in nearly three years. The offshore yuan shed 0.36 percent to 6.9025 per dollar.
The euro fell as the euro zone’s two largest members showed signs of a slowdown.
Sterling weakened as traders worried that British Prime Minister Theresa May was struggling to secure assurances from the European Union over her Brexit withdrawal deal after she survived a confidence vote earlier this week.
“The dollar is not so much rallying as much as everyone else is falling,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.
The greenback’s appeal grew following upbeat data on U.S. retail sales and industrial output in November.
The dollar’s gains were limited by bets the Federal Reserve might soon pause in raising interest rates after a widely expected hike next week of a quarter point, to 2.25-2.50 percent.
“The market is sceptical about the U.S. economy and whether the Fed would hike further after December,” Schlossberg said.
The greenback was also held back by the probability of a partial U.S. government shutdown as President Donald Trump and federal lawmakers disagree over funding for a border wall, analysts said.
The euro was down 0.43 percent at $1.13045 after German data showed private-sector expansion slowed to a four-year low in December and French business activity unexpectedly contracted.
European Central Bank President Mario Draghi told European Union leaders growth was weaker than previously forecast and urged them to go forward with reforms of the euro zone, one official told Reuters.
“I interpret this as caution that we already know is perpetual in the ECB’s thinking,” said Juan Perez, senior currency trader at Tempus, Inc in Washington.
Worries about the European economy were also stoked by uncertainty whether May could convince the British parliament to approve her Brexit deal.
Recent COT report doesn't show direct change in sentiment. Hedgers have increased positions in both sides, while speculators slightly have increased longs, but this increase is too small. While open interest have increased significantly - more than 40K contracts, this change is mostly neutral and belongs to hedgers. Thus, here we can't say that investors take position on definite side.
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The one thing that we could say is we're coming to Christmas holidays . Next week all eyes will be on Fed, what they will say about US economy. Turmoil in EU, mostly in France hardly will calm down, so tensions will hold through holidays. Due risk aversion and long holidays preparation demand for safe haven currencies could rise more. Thus, since we do not have any inner direction due some fundamental driving factor, market could follow to technical preparation to holidays. Besides, on a background of ECB statement, any Fed statement probably will sound more hawkish.
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Source: cftc.gov
Charting by Investing.com
Another important problem for EU is Italian national debt. With closing of QE, demand for government debt should gradually decrease. As Italy has 130% GDP national debt, it could get some problems with liquidity, budget deficit. They already have difficulties to agree budget with Brussels. Besides, as it is widely expected US and maybe even global recession somewhere around 2020, Italy problem could exacerbate more.
Fathom consulting brings interesting update on this subject.
Although they continue to be volatile, Italian spreads have dipped below 300 basis points in recent days amid speculation that the country’s government may be willing to cut a budget deal with the EU. Indeed, according to Fathom’s proprietary indicator, the market-implied probability of a default by the Mediterranean sovereign edged down to 14.8% in November.
As Fathom noted to clients last week, the market’s initial reaction to the coalition’s fiscal plans had perhaps caused Italian bonds to overshoot relative to their fundamental value.
However, with Italy’s debt-to-GDP ratio still above 130%, there remains a risk that a significant and sustained fiscal expansion could see the country’s already elevated level of debt spiral out of control. Added to this, analysis carried out as part of Fathom’s latest quarterly forecast suggests that, as the pool of public debt grows, fiscal policy becomes far less potent.
The challenge may be greater for present-day Italy (compares to Belgium), which has a near-zero trend rate of growth and faces the prospect of a US-led recession in 2020. That being said, the government continues to benefit from relatively cheap funding costs with bond yields close to 3% — significantly below their long-term average.
Technicals
Monthly
December month shows very small range and has no impact on monthly picture at all. Here we mostly wait for clarity - either downside breakout and start action to 1.08 and later to 1.03 or ability of the EUR to hold above 1.12 and turning up. Market stands at wide support area between major 5/8 Fib level and YPP, which also natural support/resistance area.
Indirect technical factors point on market's weakness, as EUR can't jump out from strong support within more than 5-6 months and just lays upon it. Trend stands bearish here.
Monthly situation shortly could be described as indecision with light gravitation to the downside.
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Weekly
So, guys another bearish grabber has been formed this week. Now we have three of them. Market stands in tight range for almost two months. From technical point of view, weekly patterns has a dominant role over daily and intraday ones. While market stands below 1.15 - they keep bearish scenario possible and any bullish scenario on lower time frames will be under risk of failure.
Grabber target suggests drop below recent lows and probable reaching of at least 1.1185 major 5/8 Fib support. Here we have also divergence with Dollar Index. Grabbers stand there as well, but Dollar index has formed new top recently, while EUR is not.
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Daily
On Friday our triangle was broken down, daily grabber has been erased. This lets us turn again to our former scenario of possible downside AB=CD pattern with 1.12 target. Potentially we could either "222" Buy or Butterfly pattern, depending on what market will do around recent lows and whether will be any attempt to take them out:
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On Dollar Index this picture looks more attractive as butterfly and AB-CD targets stand closer to each other.
In fact bearish area is wide and lets market fluctuate in big range - up to 1.15 area. While market was showing bullish scenarios last week - all of them were under pressure of weekly bearish context, and have failed at the end.
Intraday
Here we have relatively safe context for taking short position. Triangle was broken down, sell-off stands with very good pace. We have a lot of downside targets as above 1.12 as below it. Here on 4H we see that as OP target as butterfly 1.27 still stand intact. As market stops slightly above it - next week it will gravitate down to complete. Upside retracement has good target - re-testing of broken trend line around 1.1340 area:
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On 1H chart we have mostly the same patterns but of a smaller scale. Stop has happened as EUR touched minor XOP and 1.27 butterfly target. Here as well - price shows fast drop and major XOP as well as 1.618 stand untouched. They stand in the same 1.1250 area. Fib levels shows good K-resistance of 1.1335-1.1345 which coincides with line of triangle that has been broken.
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In current circumstances it is difficult to foresee what targets beyond 1.1250 market could hit, but this is secondary question right now. What is really good - that we could take short position with relatively small risk.
Conclusion:
Sentiment analysis shows that market doesn't have clear direction by far as no big change in position of investors have happened. Still, we suggest that EUR will be under pressure till the end of the year due technical factors - long holidays, political uncertainty in Germany, unrest in France that spreading over EU should trigger risk aversion and demand for safe haven currencies. This makes us gravitate more to bearish action within few weeks of moderate pace. Our 1.1185 major Fib support could be reached in December.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
