EURUSD Outlook: Week of 4/7

by on April 7, 2014 10:59 am BST

The euro continues its decent against the greenback as central bank policies between the European Central Bank (ECB) and the Federal Reserve continue to diverge. The Fed has indicated that the asset purchase taper will continue with the potential of interest rate tightening sometime in early-2015. On the other hand, the ECB make be forced to indulge into asset purchases in order to thwart low inflation and potential fundamental weakness.

Eric Viloria, a FX strategist at Wells Fargo & Co., said “the Fed is continuing to taper and there’s a relatively high hurdle for any deviation from that.” At last week’s ECB press conference, ECB President Mario Draghi indicated the possibility of buying debt in order to boost inflation, which stands at .5 percent. Viloria included that the low interest rate policies of the ECB will help place a floor in the EURUSD decline, for now.

Traders will also be focused on Wednesday’s FOMC minutes in hopes of clarification on when the Fed may tighten their lax rate policy. Fed chair Janet Yellen, in the previous FOMC press conference statement, said that the Fed funds rate could be tightened within six months following the asset purchase program’s discontinuation. However, since then, Yellen has separated herself by becoming more vague on the topic. Estimates on a rate hike range from .25 to one percent, while the market has been pricing in a .25 percent increase from the current zero percent policy, known as ZERP.

In regards to the dollar strength, “when positioning is extremely short, to me that’s a signal that there’s more risk that they buy back those shorts,” said Imre Speizer, strategist at Westpac Banking Corp. It is still unclear when the Fed will actually tighten. Yellen has disconnected the 6.5 percent unemployment target and went to a broader – again, more vague – grouping of economic indicators.

Last week’s non-farm payrolls came in at 192K versus the 199K expected. Although it is a slight miss, economists were expecting a “pent up” of demand due to inclement weather in the US; and, it looks like that was not the case.

Price action on EURUSD remains weak after breaking through the large ascending channel and began trading into a smaller, descending channel. Price action bounced off the supporting trend line. A pullback to the 50 EMA at 1.3748 is probable due to the degree of price action decent, while further resistance is seen at 1.3770.

The decline has seen an increase in momentum. The – DMI has sharply converged into the + DMI, but it looking to be pausing. This could suggest a consolidation prior to the FOMC minutes. The ADX is sloping upwards, which supports a continuation of trend.

1D Chart of EURUSD

1D Chart of EURUSD