FX Traders' weekly EURUSD fundamental & technical picture,likely trend, trading range, and drivers

The following is a partial summary of the conclusions from the fxempire.com weekly analysts' meeting in which we cover outlooks for the major pairs for the coming week and beyond.

 

 

Summary

1. Technical Outlook: Another failed bottoming attempt and implications, likely trading range this week
2. Fundamental Outlook Summary: The recent fundamental drivers strengthening, and what could counter them and lift the pair
3. Fundamental Outlook 1: Daily market movers and lessons learned from them
4. Fundamental Outlook 2: Lessons and likely market movers for the coming week and beyond

EURUSD Weekly Technical Outlook: Friday Breakdown Negates Bottoming Attempt

EURUSD Weekly Chart July 15 2012 to Present
KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange. Green downtrend line from EURUSD peak of July 2008 to present, green uptrend line from August 2012 to present. White Fibonacci retracement lines for downtrend of August 2008 To June 2010, yellow Fibonacci retracement lines for downtrend of May 2011 To July 2011.
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

This Week's Outlook And Likely Trading Range

The big technical insight as that the expected near term bottoming in the EURUSD, which looked on track all the way through Thursday, failed with Friday's breakdown.

Daily EURUSD Chart August 4 To Present, Weeks of August 18-29 highlighted
KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange.
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

The pair broke below what had been the week's support level around the 1.3200 - 1.315 area and made its biggest move of the week, twice the distance of any daily move all week, a roughly 485 pip drop to close at 1.3136.

The break below the weekly trading range and support, after the week had already began with a gap down on the daily charts, is technically damaging. Unless the pair can get back over 1.3200 this week, that level becomes yet another former support point turned into resistance.

The breakdown suggests that bearish strength isn't exhausted yet. Consider, despite the already crowded EURUSD short positioning, Monday's gap lower, and the tight Monday to Thursday trading range, all these factors failed to signal a bottoming. Instead, traders lightened up again on EURUSD longs yet again, further crowding an already crowded short position.

As the daily chart above shows, last Friday was the second straight Friday selloff, to close at the week's lows, after the pair had attempted a bottom in the prior days.

Friday's breakdown revealed a further degree of capitulation by EURUSD bulls and conviction by EURUSD shorts.

The close at 1.3136 brought the EURUSD down to the next level of support, the lower edge of its descending channel shown in the weekly chart above.

As we discuss in our fundamental analysis, this week's packed economic calendar's top two events, the ECB monthly meeting (including rate statement and press conference), and the US monthly jobs reports, both are more likely than not to further undermine the pair. While few expect the ECB to announce new easing yet, many think it could begin preparing markets for that. Meanwhile, US jobs reports for August are expected to continue to show the US adding 200K or more jobs per month, keeping the Fed on its gradual progress towards a rate hike in the coming year. Of course, don't forget that Russia continues to feed concerns about further economic damage from yet another round of sanctions as it moves from covert to overt invasion of Ukraine.

Likely Range For This Week

The next support level is around 1.3070, the 23.6% Fibonacci retracement of the EURUSD's downtrend of August 2008 to June 2010. This is the likely bottom end of this week's trading range if the above two biggest events are EURUSD bearish. If those events turn out to be EURUSD bullish, then the likely highs of the week are either last week's main support area around 1.32, then the 38.2% Fibonacci retracement line around 1.325

Longer Term EURUSD Outlook

Continuing the theme of the past 7 weeks, the medium term outlook continues to deteriorate from a variety of technical perspectives, chart patterns, support breakdowns, and strengthening downwards momentum. In addition, the pair's slow grind lower within its descending channel has accelerated decisively in the past two weeks, as Ukraine tensions, bearish data, and central bank expectations all turned further in favor of the USD. See our fundamental analysis for details, of which there are many.

The most outstanding change for the worst is the fourth consecutive penetration of yet another key support level in as many weeks, this time the 1.3200 level.

Four weeks ago the pair decisively broke through its 200 week EMA around 1.342 As the oldest of our EMAs, such a confirmed breach takes real conviction among traders that the EURUSD is headed lower..

Two weeks ago the weekly close confirmed that downward breakout with a plunge that took out support at the 1.333 level, which had held for three weeks despite plenty of bearish news from both the Ukraine crisis and the economic data, offering EURUSD bulls hope for an oversold bounce.

Hopes for a bottoming this week were again frustrated as the 1.32 level gave way under pressure from both the same bearish fundamentals (data, central bank policy speculation, Ukraine) and from concerns about next week's big events noted above, and discussed in our fundamental analysis in more detail

Here are the details of the key elements of the technical breakdown on the weekly EURUSD chart.

1. Bearish Head And Shoulder Pattern Gets Further Confirmation: The past weeks additional declines, after the prior week's pause (due to a below-forecast US jobs report), confirm the bearish medium term pattern. It's hardly a classic H&S pattern given the head is dispersed over a few weeks and the somewhat asymmetrical and lopsided shoulders in December 2013 and June 2014 (the June shoulder's a bit lower).

However the principal behind the H&S pattern applies here. That is, a failed attempt to rally, followed by further declines that suggest the EURUSD's rally that began in mid-2012 is officially over.

Note the specific elements of the Head and Shoulders Topping Pattern:

1. We've a temporarily successful bounce off late January lows and drive a to new highs from December 2013 to March 2014
2. A pullback that bottoms in mid-June
3. A failed rally that tops out in early July, which, significantly, topped at resistance created by the medium term uptrend line dating back to June 2012, which proved its strength by resisting 4 straight weeks of tests. The current move lower has created a new series of lower lows and lower highs, aka a downtrend. The technical evidence of the new downtrend also includes violation of key support as detailed below.
4. Violations Of Key Support: As noted above
5. Accelerating Downward Momentum
   1. All EMAs trending lower except for the longest term, least sensitive 100 and 200 week EMAs, which have flattened. The 20 week EMA (yellow) appear set to cross below the 50 week EMA (red), after the 10 week EMA (blue) crossed below it weeks ago. This would signal more entrenched momentum, as does...
   2. The pair completes its 10th straight week in the DBB sell zone, and its 4th straight week of hugging the very bottom of this zone.

Concluding Thoughts: Medium Long Term Technical Outlook Strategic Summary

As we cover in our fundamental analysis, the EURUSD's downtrend continues to be more a reflection of the growing fundamental weakness in the EU, aided by fears of added drag from Ukraine, rather than of any dramatic strengthening of the US economy or of expectations of a Fed rate hike, though next week's August US jobs reports could bolster these.

The unequivocal message from the weekly charts is that the pair will find itself lower in the months ahead, albeit with possible normal counter trend moves within the longer term downtrend.

Fundamental Outlook- Introduction

A continued variety of negatives for the EURUSD this week.

• The above continued technical breakdown, discussed above, which by itself can bias traders to focus on negatives rather than positives. Countering this negative bias, to some extent, is the fact that the short EURUSD trade is already crowded and thus the pair is vulnerable to sudden jumps higher on even mildly positive news.
• Rising speculation of more ECB stimulus coming sooner sparked by Draghi's Jackson Hole speech that caused the EURUSD to gap down at the start of the week.
• Continued data gap, as US data outperforms that of EU. This in turn feeds....
• Speculation on when Fed and ECB policies begin to really diverge and give the USD an actual long term rate advantage that drives the pair lower and into a more persistent downtrend.
• Monday's French government collapse on internal divisions about economic policy direction as current reforms facing growing opposition.
• Uncertainty about effects of Russia's increasingly explicit Ukraine invasion. This has become such a blatant act of outright unprovoked conquest that new rounds of sanctions that go beyond merely symbolic effects are increasingly likely.
  • As noted above, after the pair gapped lower to start the week, and then managed to stay in a tight range from Monday to Thursday, predictions for at least a temporary bottoming looked solid. However for the second straight week, we had a Friday selloff that drove the pair firmly lower for the week. Why?
• Continued pressure from the above, particularly yet further escalation of the Ukraine crisis to a full blown shooting war with Russia now overtly involved and committed to supporting further conquest of Ukraine territory in addition to Crimea.

The very real potential that the coming week's two big calendar events, Thursday's ECB meeting and Friday's US August jobs reports, favor further EURUSD declines. The bears are clearly doing a bearish version of "buying the rumor" with further selling.

The big question is, will end of week action see them "sell the news" by taking profits on short positions and/or taking new long positions?

Fundamental Outlook: EURUSD Daily Market Movers

Monday: Continued Reaction To Draghi Inflation Worries

The pair gapped lower to start the week from 1.3242 to open around 1.3197. Top tier data out of both the EU and US was poor, and the move was widely attributed to continued reaction to Mario Draghi's impromptu surprisingly dovish Jackson Hole comments. These suggested he now saw deflation as a more long term problem that demanded more easing, sooner (see below for details). An attempted bounce back to 1.3200 failed, and the pair closed near its low of the day around 1.3182, and it spent the rest of the week fluctuating around that level.

The Monday move was the big price action for the week. The big lesson we draw from that is that the rising expectation for accelerated ECB easing was THE fundamental EURUSD driver of the week, with economic data and geopolitics distant, secondary factors.

This is no big surprise, but bears repeating. As EURUSD drivers go, central bank policy speculation is all that really matters for the medium and long term trends. Remember that the week before, the big market movers for the pair were:

1. The relatively hawkish July FOMC meeting minutes (they revealed future tightening was actually under discussion).
2. Friday's speeches by Yellen (a bit less dovish than expected message yet again), Draghi's impromptu words about how deflation was proving more persistent than expected (ok, aided by some news of new Russian escalation in Ukraine). If Draghi now thinks inflation is a more serious issue, then traders are thinking more ECB stimulus will come sooner than previously thought. That would undermine the USD.

Tuesday: US Data Improves, Russian Situation Deteriorates

The pair fell a bit more, as:

US data improves: US durable goods, the Richmond manufacturing index, and CB consumer confidence came in better than expected (in contrast to falling German confidence).

Russian situation deteriorates: There were no major European economic reports, but Russian forces crossed the Ukraine border, were captured and paraded in front of cameras as proof of Russian meddling. Russia claimed it was all a mistake (?!). Indeed it was, but what kind of mistake were they referring to? We already know that news of escalations can pound markets and keep the EUR under pressure. This was probably the main driver of the day

Wednesday: Speculation Cools On New ECB Easing

The pair made its big bounce for the week, after Reuters quoted an unnamed ECB sources saying that the ECB isn't likely to start any new asset-purchase-program any time soon. Although the market has probably not fully pricing a QE-like program at the September 4 ECB meeting, the EUR's continued drop has encouraged those expectations to some extent.

This bounce on a minor unsubstantiated report is typical when the bearish position gets crowded. The pair is primed to bounce on any minor bullish news, at least in the short term.

Thursday

Further evidence of Russian military escalation, weak EU PMIs, and strong US data that included forecast-beating Q2 GDP and pending home sales reports sent the pair slightly lower on the day. The fact that the pair gave so little ground despite all of these negatives suggested a bottoming.

Friday

Daily EURUSD Chart August 4 To Present, Weeks of August 18-29 highlighted
KEY: 10 Week EMA Dark Blue, 20 WEEK EMA Yellow, 50 WEEK EMA Red, 100 WEEK EMA Light Blue, 200 WEEK EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange.
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com

Did I say bottoming? Oops. The pair broke below what had been the week's support level around 1.315 and made its biggest move of the week, twice the distance of any daily move all week, a roughly 485 pip drop to close at 1.3136.

Why? The answer isn't in day's events, which were more of the same:

• Continued Russian moves into Ukraine and rising fear of damage from the next round sanctions.
• In the EU, the big event was the big German retail sales miss (0.1% forecast vs. -1.4% actual) and most of the other reports were as (bad as) expected. In the US, personal spending missing forecasts modestly, while both the Chicago PMI and revised UoM consumer sentiment reports beat forecasts substantially. Overall, another day of good data for the US and bad news for the EU.

While there was no obvious explanation for the move, we suspect that there was a degree of capitulation on long positions ahead of next week's packed economic calendar, which includes both an ECB meeting that could well hint at new easing, as well as the US monthly job reports, which are likely to continue to show over 200K jobs added. Both of these possibilities would further undermine the pair.

As noted above, the break below the weekly trading range and support, after the week had already began with a gap down on the daily charts, is technically damaging. Even Monday's gap lower and the tight Monday to Thursday trading range failed to signal a bottoming, as traders lightened up on EURUSD longs yet again, further crowding an already crowded short position. This Friday breakdown revealed a degree of capitulation by EURUSD bulls and conviction by EURUSD shorts.

Lessons: Current EURUSD Fundamental Drivers

In sum, we've continued downward pressure from the same big fundamental drivers of the current downtrend (US outperformance feeding speculation about an eventual USD rate advantage plus fears of new economic damage to the EU from the Ukraine crisis) in addition to concerns about new bearish fuel from the ECB meeting next week and US jobs reports results.

Although we don't believe that coming the October 17 announcements of EU bank stress tests are worrying investors, we suspect these should be a concern, and will be as that date approaches.

Fundamental Outlook: Lessons And Market Movers For The Coming Week And Beyond

So what did last week teach us, and what are the likely top EURUSD market movers to watch?

Data Gap Between EU and US Continues

As noted above, the biggest long term market mover for the pair is what the market thinks about the pace and timing of coming ECB easing and Fed tightening. Both central bank heads would admit that key growth and inflation trends are what ultimately drive their decisions.

In other words, the "policy gap" between ECB easing and Fed tightening is driven by the widening "data gap" between improving US data and deteriorating EU data. So let's update on that first.

US: The highlight of the week was that GDP growth soundly beats expectations. The big bright spot was that nonresidential fixed investment, a proxy for business spending, was up 8.4% for the quarter. It was revised up from an earlier estimate of 5.5% growth. The lack of capex spending from businesses has been a concern, so this uptick was particularly good news. Durable goods and CB consumer confidence also beat expectations.

EU: Although US economic data has not been uniformly good, EU top tier data has been virtually all bad, be it PMI reports, GDP, deflation (see here too), unemployment, German consumer confidence, EU general consumer confidence, take your pick. The results range from below forecasts, to in-line with forecasts that were already bad.

Coming Split Between ECB, Fed Policy Bearish For EURUSD

The unrelenting underperformance of the EU economy versus that of the US continues to feed speculation about when we'll start to see anticipated Fed and ECB policy divergence actually take place. It has already begun. QE is nearing its end, and the ECB has its TLTRO programs announced for additional easing. However practical differences have been minor thus far.

-Benchmark rates are not that different.

-As we reported last week, Ed Hugh has noted that with old LTRO loans being repaid as the TLTRO program starts, the net addition of liquidity won't happen until near the end of 2014.

However the continued divergence between US and EU economic performance has many analysts thinking we'll see the first 25 bps rate increase sometime between March and June 2015.

Why The EURUSD Fell Friday, Gapped Down Monday

In sum Draghi's impromptu remarks clearly indicated more stimulus could be coming sooner as he acknowledged that deflationary forces have proven more persistent than he thought.

EU Sovereign Bond Yields Reflect Belief More ECB Easing Coming Sooner

That opinion was shared where it mattered most, in the bond markets, where EU bond yields fell despite continued poor data. The idea is that coming stimulus, especially some form of QE that involves outright purchases of EU sovereign bonds will drive bond prices higher and thus bond rates even lower.

Fundamentals: Top Calendar Events To Watch

As noted above, the biggest events for the pair are:

Thursday's ECB meeting, rate statement and press conference. While most don't expect new policy announcements, there's a real chance there will be hints that more stimulus is coming sooner than previously thought, particularly given Draghi's rising concern over deflation and coming damage from new rounds of economic sanctions on trade with Russia.

US August jobs reports, which are expected to show the US continues to add over 200k jobs per month, putting its slowly improving employment situation in stark contrast with Europe's.

Here's a brief rundown of the biggest EURUSD events.

Monday

China: Manufacturing PMI (official data focused on big state owned firms), HSBC final manufacturing PMI (privately compiled, focused on smaller privately owned firms). Both are relevant for the EURUSD because China's status as leading global growth engine means top tier reports like these influence overall risk appetite, with which the EURUSD usually moves (albeit not recently given ECB easing, bad EU data, and Russian tensions, all of which are undermining the EUR more than other assets).

EU: Italian manufacturing PMI

US: most markets closed for Labor Day

Tuesday

US: ISM manufacturing PMI (its labor component is seen as a leading indicator of the big monthly US jobs reports on Friday)

Wednesday

China: Non-manufacturing PMI, HSBC services PMI

EU: Spain, Italy, EU services PMI survey, EU retail PMI survey,

US: factory orders, Beige book

Thursday

EU: German factory orders, ECB rate statement and press conference (will it indicate new easing is coming?)

US: Trade balance, weekly new jobless claims, ISM non-manufacturing PMI (its jobs component is an even bigger leading indicator of the Friday monthly jobs reports than the mfg. PMI as services are a bigger employer)

Friday

EU German industrial production

US: NFP jobs report, unemployment rate, avg hourly earnings

The 6 Biggest Questions For EURUSD Traders

1. Will Russia escalate?
2. Will the ECB September 4 meeting indicate new easing coming sooner than expected?
3. Will key EU and US top tier data continue with the "US outperforming the EU" theme, and if so, will that raise expectations for faster ECB easing and/or Fed tightening? Again, it's changes in sentiment on central bank policy direction that move the EURUSD more than anything else these days. Also, Fed policy is no longer viewed as being on automatic pilot. Rather, the end of QE and improving data continue to feed speculation of further tightening steps beyond
4. Will the ECB meeting Thursday feed expectations for more EUR-dilutive stimulus coming sooner than previously thought?
5. Will Friday's US jobs report feed expectations for faster Fed tightening.
6. If these two big events are indeed as bearish as anticipated, could we still see a bounce as short sellers close positions on a "sell the news" move?