📈 Fed's first cut since 2020: Time to buy the dip? See Tech-focused stock picksUnlock AI Picks

EUR/USD Forecast: ECB And Fed Funds

Published 12/26/2015, 07:14 PM
Updated 09/03/2023, 03:41 AM
EUR/USD
-
GBP/USD
-
AUD/USD
-
USD/NZD
-
DXY
-

EUR/USD's position today and since Yellen's Fed Funds raise and Draghi cut is exactly neutral. Neutrality through my interest rate models means, daily, 1 month, 3M, 6M and 1 year. Why. ECB and Fed Monetary policies converged rather than diverged as all the market people claimed. Prior to Draghi's cut, Eonia V Fed funds stood at 0.8 V 0.15, a 65 Bps wide channel. Then Draghi cut to 0.70 while Fed Funds stands at 0.36, a 34 bps wide channel and a 31 bps convergence. if Yellen refused to cut then the channel would've stood at 55 bps and no big deal to continued EUR/USD downtrend.


We have convergence on our hands, not divergence. For all the stories about divergence, USD will do X, past USD acted like X in past cycles were all wrong. The 0.50 Fed Funds, 0.05 in ECB's Fixed Rate and 0.30 in the Marginal Lending Facility is pablum information as it doesn't drive markets or exchange rates. Interest differentials actually favor EUR/USD as Yellen's raise and present convergence dead stopped EUR/USD's downtrend.


Further to neutrality, European interest rates short term are in correct positions while long end positions still have light years to travel downward. Viewed from 1 year, every European interest rate is severely oversold as model averages are still adjusting to the first September 2014 ECB cut to 0.80. Long and short ends in European interest rates are fighting against each other in daily, monthly, 3 and 6m time frames to offer a further neutrality conundrum.


Convergence and neutrality means not a trend but slow price movements where tops are sold and bottoms bought to allow a price to remain in perfect neutrality until a market event breaks the deadlock. To define neutrality further, curves at the short end since Yellen and Draghi offer about 18 pip ranges while long ends offer about 70 pips. Draghi cut at the exact time when the first September 2014 decrease was finally reflected in the market. Short ends now reflect the new cut while the longer ends will take much time, possibly 1 year to adjust.


Why intent focus on EUR is because EUR still offers the widest ranges among its peers. GBP/USD offers 31 and 27 pips between long and short ends while AUD and NZD offer 10 and 15 pips each. EUR/USD remains the pair to trade as it will outperform its counterparts despite its neutrality position. Points holding EUR/USD are 1.0850 - 1.0865 below and 1.1060's above. Then comes the 1 year average at 1.1115 while a break of 1.0850's would not only see the downtrend resume but 1.0700's and 1.0600's should be seen quickly.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.