Technical Musings About The Euro And Dollar Anchored By Macro

The $1.1475-$1.1550 is an important area for the euro. Many bulls see a rounded bottom being carved and a break above it would be embraced as a confirmation. The lower-end corresponds to the 100-day moving average. Such a bottom pattern, if confirmed, would project toward $1.1800 the high in H2 18. On the downside, the low from H2 18 was near $1.1200. This is just above a key (61.8%) retracement of the January 2017-February 2018 rally. A convincing break of it would signal a new leg down in the euro that could potentially carry it into the $1.05-$1.08 range. 

The bull case for the euro rests on three premises: The bad news has been discounted, fiscal policy will be less of a drag, and US problems are mounting. The first is questionable. The Spanish and Germany November inflation, reported before the weekend fell more than expected, largely reflecting the drop in oil prices. And this is after the November PMIs disappointed as well. The continuing slowdown of the Chinese economy is also bound to hit the export-oriented economies, and especially Germany. On the other hand, the market has already pushed out what was thought to be a late 2019 hike into H2 2020. 

What else can the market do?  It can price in a cut rather than a hike. In effect, that is what the market has done in the US. From pricing in a couple of hikes next year, the market appears to have mostly discounted a Fed cut in 2020. Of course, at first, and perhaps with some guidance by the ECB, the market can push out the rate hike further into 2020 and then beyond. However, if the economy continues to soften more action may be required. There is already some speculation that another Targeted Long-Term Repo Operation (TLTRO), a three-year low rate loan to banks for lending to non-financial businesses and households. The problem, though, may not be the supply of funds but demand.  

The question may become what should it do: Resume asset purchase or cut interest rates (where the deposit rate already sits at minus 40 bp)? It may depend on the timing of the issue and the personnel on the ECB Executive Board, but we suspect the ECB would be more inclined to deal with the unintended consequences of a more negative deposit rate than the renew the asset purchases, especially so quickly after winding them down. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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