Key Points:
- Markets are pricing in a high probability of a hike to the FFR.
- euro Dollar to remain under a bearish cloud.
- Watch for volatility around the FOMC decision.
The euro was initially buoyant in the early stages of last week as the EU Retail Sales figures proved relatively robust at 1.1%. However, news that the ECB was extending their QE program and an uptick in the US Core Durable Goods Order figures to 0.8% started a slide that continued for the remainder of the week. Subsequently, the question remains as to what next for the embattled euro given than the FOMC risk event is looming. It therefore makes sense to take stock of what has occurred in the past few days and what is potentially on the horizon for the venerable euro/dollar.
The euro started strongly last week as markets reacted positively to the surprise uptick in eurozone Retail Sales to 1.1% m/m. This saw a rally develop which took the pair back above the 1.07 handle, but the move stalled when news was released from the ECB that the central bank intended to extend its current QE program whilst also lowering the buying rate. A range of stronger than expected US economic data was also released with a surprise uptick in the US Core Durable Goods Order figures to 0.8% proving decisive. Subsequently, the momentum moved to the downside and the pair continued to slide lower for the remainder of the week to finish around the 1.0559 mark.
Looking ahead, it’s likely to be an exceedingly busy week for the euro with a slew of US economic data, as well as the FFR decision due for release. In particular, the FOMC’s decision on interest rates is likely to be relatively critical for the near-term trend. The market has all but priced in the advent of a 25bps hike given the relative strength of the US labour market. However, there still remains a slim possibility that Fed will again delay any action, given the lack of persistent wage inflation, which could cause some sharp volatility and appreciation for the EUR. Subsequently, keep a close watch on the decision as Yellen’s statement following the event is likely to contain plenty of illuminating comments and potential volatility.
From a technical perspective, the initial bias for the week ahead is bearish given that the pair has failed to sustain its position above the 1.08 handle and the 55 EMA. In addition, the RSI Oscillator is continuing to trend lower, within neutral territory, suggesting that there is still room to move on the downside. Subsequently, the downside target for the week ahead is likely to be the 1.0504 support level. Support is currently in place for the pair at 1.0530, 1.0504, and 1.0461. Resistance exists on the upside at 1.0657, 1.0690, and 1.0758.
Ultimately, the euro is likely to retain its bearish trend for the immediate future without some sort of fundamental shock from the US Federal Reserve. A sharp retracement back above the 1.08 handle only seems likely in the case of the FOMC electing not to raise rates in December.
Although this is a small possibility, the reality is that the central bank has gone to some lengths to set expectations ahead of the meeting and would, therefore, risk their long term credibility. Subsequently, expect the euro to remain largely bearish in the coming week as the market adjusts their forward looking expectations in the aftermath of a FFR hike.