Euro 6-month Bullish Trend Nearing a Reversal
The Euro has been on a 6-month bullish trend towering at 1.1415 late in Friday after hitting a low in January 2017 below 1.0400. The trend seems however out of steam and is expected to revert to parity over the long term with at least a correction in the short to mid term.
The strength of the Euro comes as a paradox since the US economy keeps showing signs of strength for some time now. The Federal Reserve having raised its target rate to 1.25% against 0% for the ECB should have given an impetus to the Dollar.
The bullish and pro-business attitude of the US president is giving wings to the market and has induced large overseas deals such as the $1 billion arms sale to Taiwan, which follows the enormous $100+ billion deal with Saudi Arabia.
Globally the menacing rhetoric Trump has adopted towards companies outsourcing jobs since his inauguration has pushed a number of corporations to pledge to keep jobs in the US and/or bolster their presence. This factor has drawn significant action from domestic and foreign industrial giants to strength their presence on the American soil.
More bank friendly legislation is expected and banks are already grossing their ranks by hiring talent from the ailing hedge fund industry. The higher interest rates also help the banking sector bottom line in the US compared to their counterparts in the Eurozone.
Overall the US economy sent mixed signals during the past week with consumer confidence rising while durable goods orders were lower than expected and in negative territory similar to home sales.
On the other hand the Eurozone has been showing strong signs in the same period in Germany in particular where business confidence, consumer prices and retail sales are up and above expectations. The sustained domestic consumption should continue lifting the German and European economy.
These elements were echoed during the ECB head Mario Draghi's speech in which he pointed to a healthier Eurozone economy and the possibility of removing quantitative easing without hurting economic prospects1.
However Brexit fears still loom over the horizon with possible unexpected results for the Eurozone in terms of trade. Britain’s exit from the European Union might have a negative impact on the region’s economy.
The recent election of Emmanuel Macron as president of France signals a bullish and stronger view on the Franco-German cooperation to move the EU in the right direction with eventually a strong Euro. The French head of state is expected to follow the German example and push for more EU integration.
Next week is a busy week and will be decisive for the US Dollar. Important indicators are going to be released including unemployment rate as well as the non-farm employment change gauging the health of the core economy. Another important indicator is the manufacturing index showing the business output.
Two important central bank meetings will be taking place: Federal Open Market Committee meeting minutes on Wednesday and the monetary policy report due to be released on Friday which should give some insight into how US interest rates might evolve and what their impact on the dollar might be.
Additionally a G20 meeting will be held during the next weekend and could give way to important announcements that might affects the EURUSD pair. The finance ministers and central bankers of the 20 most industrialized countries will attend the meeting.
Potential support levels during the correction could materialize at 1.1116 in the near term, 1.0834 in the mid term, 1.0566, 1.0492 and 1.0356 near parity and at the January low point over the coming month if a clear trend establishes itself in favor of the dollar.