Article by ForexTime
A lower quantity of economic data released from Europe has resulted in a quieter European session on Wednesday, with the majority of investors awaiting tonight’s FOMC Minutes release.
The only noticeable movement on the currency markets has so far consisted of the GBPUSD rejecting a prolonged stay at 1.61 for the second consecutive day, alongside further indications the Eurodollar doesn’t have the legs to progress to 1.27. From a technical standpoint on the Daily timeframe, it appears that the EURUSD is currently consolidating inside its bearish channel after a period of heavy selling. It is also worth noting that potential runs to 1.27 have been capped by resistance between 1.2697 and 1.2673 for the past five successive days. A technical strategist might even suggest this consolidation period is just a correction for the next Eurodollar leg lower, which would allow the pair to continue trading within the same channel.
The Eurodollar sentiment remains bearish and will likely require an unexpectedly dovish FOMC Minutes release for the EURUSD to advance to 1.27. Although there was widespread Greenback profit taking on Monday ahead of the release, there are no real indications that the FOMC Minutes will necessarily be dovish. We are probably not going to receive any timeframe hints from the Fed regarding when it will raise interest rates. In fact, if we receive formal wording tonight that Quantitative Easing (QE) will conclude in a few weeks’ time and the markets rightly perceive this as a clear signal that although the Fed are not dropping a timeframe hint, it is moving towards normalizing monetary policy – we can’t rule out the potential for USD strength tonight.
If the Eurodollar is going to appreciate, we require USD weakness because the EU economic sentiment is bleak and unfortunately, it just seems to carry on getting bleaker. For example, concerns have emerged that the German economy might even contract in Q3. Over the summer period, German economic releases raised eyebrows but there’s no doubting there has been an unanticipated deterioration in German data within the past fortnight. This has included an unexpected German manufacturing contraction, a decline in both IFO and ZEW expectations, alongside the largest German Factory Orders decline in five years. IMF Chief Economist, Olivier Blanchard expressed yesterday that “growth in the euro area nearly stalled this year, even in the core” and I look at this comment as a further signal that German performances are concerning.
Additionally, fears of stagnant economic growth within Europe remain and inflation levels are dangerously low. It is still hoped that the weaker EURUSD exchange rate will improve EU economic fortunes but we are yet to see any correlation, and we might not until the end of the year. Overall, as long as the United States economy continues to naturally progress on a consistent basis, meaning the US economic sentiment remains intact – soft EU data will continue to awake the bears. ECB President, Mario Draghi suggested in August that “the fundamentals for a weaker exchange rate are better now than they were” and he was right. As long as the divergence between the US and EU economy remains by the time the Fed concludes QE at the end of the month, we are looking at a 1.23 EURUSD valuation.
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Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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