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Will the Euro Accelerate Lower or Bounce this Week?
The euro has declined for seven consecutive weeks. This is the longest consecutive losing streak since 1999. Will it accelerate lower or bounce?
Market Conditions
We are at the point of a seasonal shift at the end of the North American summer doldrums characterised by low volume and low volatility. Monday is the Labour Day holiday in the US and Canada, which will drain liquidity from the market. On Tuesday, as investors return, volume and volatility should increase. Increased volatility may place a check on the dollar’s advance.
Monetary Policy
The US QE taper continues with debate centring around the timing of the first rate hike. At Jackson Hole the ECB’s Draghi suggested a closer activation of an asset purchase programme. With the ECB more dovish than the Fed, the medium-term prospect for the euro is bearish.
Geopolitical Tensions
With Russian tanks and troops moving into Ukraine European Union leaders have given Russia a week to reverse course, or it will face a new round of sanctions with negative implications for the euro.
COT Positioning at Extreme
COT net short positioning is at an extreme which has historically been accurate in identifying market reversals.
The SWFX Sentiment Index
The consumer sentiment index for the euro is 66% long, which is a contrarian indicator suggesting a bearish continuation.
Dukascopy Currency Index
This index shows the strength of the dollar last week relative to the yen and the euro. Can the dollar continue its advance or will it pause and retrace with the expected increase in volatility?
High Impact Event Risk
The Dukascopy economic calendar shows Euro and US GDP and PMI readings on Monday and Wednesday. The main event for the euro will be the ECB rate decision and monetary policy statement on Thursday. The market has priced in dovish expectations. If the statement is less than dovish, merely neutral, this could result in a euro rebound. On Friday we have the US non-farm payrolls, unemployment rate and average hourly earnings. The market will be looking to this to gauge expectations of the timing of the Fed interest rate increase. If the data is as expected, or better it will be positive for the dollar.
Conclusion
The balance of probabilities is that there is a strong likelihood of a euro rebound this week. The medium-term bias of the euro remains bearish. Increased geopolitical tensions, a less than dovish ECB monetary policy statement or strong US employment data could see the bearish trend of the euro accelerate.
The euro has declined for seven consecutive weeks. This is the longest consecutive losing streak since 1999. Will it accelerate lower or bounce?
Market Conditions
We are at the point of a seasonal shift at the end of the North American summer doldrums characterised by low volume and low volatility. Monday is the Labour Day holiday in the US and Canada, which will drain liquidity from the market. On Tuesday, as investors return, volume and volatility should increase. Increased volatility may place a check on the dollar’s advance.
Monetary Policy
The US QE taper continues with debate centring around the timing of the first rate hike. At Jackson Hole the ECB’s Draghi suggested a closer activation of an asset purchase programme. With the ECB more dovish than the Fed, the medium-term prospect for the euro is bearish.
Geopolitical Tensions
With Russian tanks and troops moving into Ukraine European Union leaders have given Russia a week to reverse course, or it will face a new round of sanctions with negative implications for the euro.
COT Positioning at Extreme
COT net short positioning is at an extreme which has historically been accurate in identifying market reversals.
The SWFX Sentiment Index
The consumer sentiment index for the euro is 66% long, which is a contrarian indicator suggesting a bearish continuation.
Dukascopy Currency Index
This index shows the strength of the dollar last week relative to the yen and the euro. Can the dollar continue its advance or will it pause and retrace with the expected increase in volatility?
High Impact Event Risk
The Dukascopy economic calendar shows Euro and US GDP and PMI readings on Monday and Wednesday. The main event for the euro will be the ECB rate decision and monetary policy statement on Thursday. The market has priced in dovish expectations. If the statement is less than dovish, merely neutral, this could result in a euro rebound. On Friday we have the US non-farm payrolls, unemployment rate and average hourly earnings. The market will be looking to this to gauge expectations of the timing of the Fed interest rate increase. If the data is as expected, or better it will be positive for the dollar.
Conclusion
The balance of probabilities is that there is a strong likelihood of a euro rebound this week. The medium-term bias of the euro remains bearish. Increased geopolitical tensions, a less than dovish ECB monetary policy statement or strong US employment data could see the bearish trend of the euro accelerate.