KTM FX Weekly: EURCHF will outperform EURUSD
Financial markets seem to have spent the recent weeks discussing recession fear caused by last week’s yield curve inversion and the ongoing trade war, which causes global slowdown. Whereas the picture has changed on Monday, equity markets are broadly higher across the globe.
Hopes of a stimulus and rebound in the US treasury yields.
We believe the US will escape the recession next year whereas trade fears remain. In recent weeks, speculation has intensified that the German government is considering fiscal stimulus and Fed and ECB will cut rates and QE’ing on September meeting.
We are clear that this bounce isn’t led by fundamental factors. Across the global analysts are anticipating a new round of significant stimulus packages as fundamental worsen.
Moving away from recession fear, markets still anchor to the trade fears. The latest developments on trade pushing the dollar and equities higher.
“Trump administration signaled progress on trade negotiations” Bloomberg reported. The other week the US announced a delay in the imposition of additional tariffs on Chinese imports. Markets reacted positively to the deal, but the gains were short-lived.
Overnight the dollar index rises to early August high, besides the common currency euro fell to 1.1065. Dollar strength and German GDP contraction are the key drivers for the euro. Last week’s German Q2 GDP data confirmed again that the German economy on the edge of recession.
Data review: German ZEW economic sentiment worsens considerably, and the German Q2 GDP suggests the recession will hit the country if negative growth continued in Q3.
- The ZEW Indicator of Economic Sentiment Stands at minus 44.1 Points at its lowest level since December 2011, according to the official release. This corresponds to a drop of 19.6 points compared to the previous month.
- German Gross domestic product in the Q2 of 2019 down 0.1% on the previous quarter, destatis reported.
- On Monday (Aug 19) Eurostat released the EA inflation rate. The euro area annual inflation rate was 1.0% in July 2019, down from 1.3% in June.
Data preview: Central Bank monetary policy meetings (FOMC, RBA, and ECB), Italian confidence vote, and Jackson hole among top-tier events to keep forex traders busy. Data wise EA PMIs are the only data driver for the common currency euro.
Besides, the market will continue to focus on the US-China headlines, the latest development on Brexit and tense situation in Hongkong.
Italian crisis: “Prime Minister Giuseppe Conte is due to addresses the Senate on August 20 and parliament the following day. One possibility is that the prime minister will resign at the end of the speech, opening a formal crisis and paving the way for early elections in the fall. But given that a key piece of legislation—a long-awaited reform to cut the number of lawmakers—is expected to be debated on August 22, it is unlikely that the prime minister will want to dissolve the government beforehand and kill the reform. In any case, President Sergio Mattarella has made it clear he will not sanction new elections until the reform is fully bedded in the constitution, and that could take many months.” Moody’s Analytics reported.
TECHNICAL VIEW
When you’re on the hunt for the buy trade, you have a lot of confusion in the current global uncertainties. Whether you want a risk trade or risk-free trade or just something that works with the theme, always market offers opportunities.
We scan a couple of euro crosses that offer better returns, among we find EURAUD, EURCHF, and EURNZD to be considered. A yield inversion is negative for risk-sensitive currencies AUD and NZD.
Looking at the recent elevation of market sentiment,
we favor EURCHF will outperform EURUSD in the coming days. Among these three crosses, EURCHF seems to be oversold.
Coming back the subject EURUSD tech view, the dollar strength is going to stay for longer. Whereas the euro currency is in a sandwich position with German recession fears and the German government is considering fiscal stimulus flip side ECB rate cut with a new wave of QE.
The EURUSD nearly lost all the gains from early August, back to key support levels. The weekly trend of the common currency is range-bound with negative bias. The inability of EURUSD to sustain above the key resistance of 1.1251 should be a negative indication for the bulls.
According to the daily chart, the key support level is placed at 1.1050, followed by 1.102/1.1000 and 1.0980. In the near term the price may fall to 1.0860 (if settles below 1.1000) suggested by the corrective A-B-C wave structure.
If the price starts moving higher, key resistance level to watch out for are 1.1110 and 1.1150.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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