KTM FX Weekly: EURUSD implied volatility to pick up
Since mid-Nov 2018 the pair has been consolidating between 1.1300-1.1500, finally produced a bullish breakout last week on account of the weak dollar and Fed’s clear signal of a pause in its rate cycle. However, the price action failed to stay above the breakout.
Ahead of the Brexit vote today and the first ECB meeting of the year (23rd Jan)) we expect the pair to trade between new range 1.1820-1.1300.
Regarding the economy, we learned from the recent PMI data underpin the downside risk. Last week‘s ECB minutes acknowledge the weaker data “Incoming data on growth had been weaker than expected, reflecting softer external demand.”
Also, economic data rereleased on Monday confirmed that Europe anchored to the downside risk.
“We now have conclusive proof that Europe is in an economic slump, and that two of its biggest economies are careering towards recession” Business Insider reported.
Now markets pay attention to the upcoming PMI surveys (due next week) and ECB meeting on 23 Jan. We expect no material changes to the communication and forward guidance. Back in December 2018 meeting, the central bank remained comfortable with the growth outlook.
We also expect the ECB’s first rate hike signal after this summer is the key driver for EURUSD.
Data review: Poor EZ data
The industrial production data released for EA down by 1.7% in November, according to the estimates from Eurostat. On YoY, the industrial production fell by 3.3% in the EA. Last week Germany industrial production data was even worse than expected, a drop of 1.9% recorded.
Source:Eurostat
Technically, weak IP data for Germany and EA provided nothing new moves to either bulls or bears.
Data preview: This week we don’t have any top-tier data for EUR.
In the EA, CPI for Germany and EA are due out. Also, ECB President Draghi due to speak on the ECB’s 2017 Annual Report before the European Parliament. Besides, in the US, we have PPI along with three Fed speakers George, Quarles, and Williams.
Apart from the EA data, this week’s EURUSD price action cast on Brexit vote probably. The Guardian reported the EU is prepared to extend Article 50 until July, or perhaps even longer.
Morgan Stanley said in a note “We expect EURUSD implied volatility to pick up if the UK’s uncertain events pass.”
Natixis Bank reported “Uncertainties over Brexit and concerns over the rise of populist parties within the European Parliament following the May elections will continue to weigh on European assets, more particularly the banking sector. In such an environment, the market will increasingly price in a protracted monetary status quo on the part of the European Central Bank, which in turn is likely to weigh on the euro”.
TECHNICAL OVERVIEW
EURUSD price strengthened since early Jan low as protracted buying triggered and a break of resistance at 1.1500, confirmed upside sentiment.
The trading range is elevated from 1.1200-1.1500 to 1.1300-1.1820. Last Thursday the price ran through the target, we set before and after the new year. It halted the gains against 200EA. The 161.8 fe of A-B-C structure is pointing to 1.1640.
Now the price trade back to virtually unchanged levels, with US dollar rebounds marginally at 200MA. We expect this week’s range could be between 1.1640-1.1300.
The bearish turnaround of the oscillator should cap the rallies in the coming days.
Readers can remind that we forecast EURSUD appreciation in the end of 2018 and in the first week of this year targeting 1.1560 and 1.1590. We continue to forecast EURUSD to head higher in the coming weeks. So, we look for another opportunity to return to enter long, probably for 1.1800-1.2000.
Supports located at 1.1420/1.1400, 1.1330 and 1.1270.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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