Key Points:
- Price action holding up due to poor U.S. bond yields and a leaky equity market.
- Draghi’s pending speech will be one of the key events ahead.
- Watch for a further breakdown as sentiment swings back to the greenback.
The Euro had a torrid week after the markets seemingly unwound their hawkish view of the ECB’s policy path. In addition, the EU CPI figures also proved highly disappointing, coming in well below forecasts at a meagre 1.5% y/y. Subsequently, the past week has seen a sharp reversal, away from challenging the 1.10 handle, and we have again returned to a bearish trend direction. However, there are some interesting events coming in the week ahead so let’s review what is potentially on the horizon for the embattled pair.
Last week proved disastrous for the Euro as the air seemingly leaked out of the hawkish trial balloon that the ECB had floated. The market had previously taken a relatively positive view of the ECB’s potential policy path on hikes following some odd comments from the central bank on near term rate hikes. However, the ECB was quick to walk those comments back last week and the balloon deflated with astonishing speed sending the Euro Dollar collapsing back below the 1.07 handle. In addition, the Eurozone CPI figures also provided a negative result at 1.5% y/y which was sharply below the economic forecast. Subsequently, the pair never really had a chance to recover and ended the week sharply lower around the 1.0656 mark.
Looking ahead, the pair is likely to focus sharply on ECB Chair Mario Draghi’s pending speech, along with the always volatile U.S. Non-Farm Payroll figures. In particular, Draghi’s statement is likely to provide the market with some further clarity on the ECB’s near term policy path. Given the current level of uncertainty, it’s unlikely that the Euro has yet reached a stable equilibrium so expect plenty of volatility following the event. In addition, the U.S. NFP figures are also due out and could further complicate the pair’s near term trend. Most market analysts have estimated a 180k print but, as always, we could potentially see a fairly wide range from the metric. Subsequently, the Dollar is likely to be in-play as well which provides for a relatively volatile week for the pair.
However, early indications are suggesting that there are some negative capital flows away from the U.S. Dollar occurring. In particular, falling bond yields and a leaking equity market has seen capital flowing into safe havens overnight which has stalled the decline of the Euro Dollar, at least in the short term.
From a technical perspective, the Euro’s recent rise took it right to the 1.0905 resistance zone before a rejection saw the move reverse and a sharp pullback subsequently ensued. This development argues that the rally is now over and a new corrective phase is in progress with a downside target around the 1.0494 support level. In addition, the RSI Oscillator is continuing to trend lower, within neutral territory, suggesting that there is still plenty of room to move on the downside. Subsequently, our initial bias for the week ahead is bearish with targets well under the 1.05 handle.Support is currently in place for the pair at 1.0620, 1.0495, and 1.0364. Resistance exists on the upside at 1.0677, 1.0783, and 1.0828.
Ultimately, the Euro is likely to remain under pressure over the next few days as the inevitable sentiment swing back towards the greenback is all but assured. Subsequently, near term support is unlikely to hold for the pair and we could potentially see the pair back below the 1.06 handle in the coming sessions.
