Euro Showing Weakness Or Resilience? How To Tell And Ramifications

May 20th, 2014
in contributors, forex

EURUSD Weekly Outlook 19 May 2014

by Cliff Wachtel, FX Empire

EURUSD undermined by ECB, Bundesbank, and EU data, yet declines minimally thus far - resilience or nascent breakdown ahead? Our take, plus the bullish, bearish drivers, what to watch this week.

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

Follow up:


  1. Technical outlook: Neutral medium term per weekly charts. Bearish near term on daily charts, as the pair looks set to test strong support around 1.365.
  2. The controlled nature of the pullback, with pauses at each support level on weekly charts despite coming easing, suggests the resilience of a technical pullback rather than the start of a longer term reversal. See below for details on why.
  3. Fundamental outlook short term mildly bearish. ECB comments and weak EU data continue to pressure the EURUSD to test lower support levels. However persistent low USD benchmark rates, and market complacency about risks, limits chances of longer term EURUSD reversal for now.
  4. Fundamental outlook longer term neutral: The USD's advantages of more supportive economic data and Fed policy have yet to translate into a yield advantage needed for a sustained move lower. Longer term fundamentals remain steady
  5. Trader Positioning: Our sample of traders swung over from short to long and remains long, see below for implications.
  6. Conclusions: Is the pair topping out or just having a normal bear market pullback? Our take, why, and what would change our mind.


First we look at overall risk appetite as portrayed by our sample of global indexes, because the EURUSD has been tracking these fairly well recently.

Overall Risk Appetite Per Weekly Charts Of Leading Global Stock Indexes

This week we again minimize our usual discussion of overall risk appetite per our sample of leading global stock indexes. For the past 2 weeks they haven't helped us forecast EURUSD moves:

  • The EURUSD has ceased tracking these indexes and for now is moving mostly with its own specific fundamental drivers, rather than overall risk appetite, and it is likely to continue to do so this week. See the fundamental outlook section below for specifics.
  • The leading US and European indexes continue to flash neutral near term trends characterized by narrow, flat ranges, full of indecisive 'doji' candles on their weekly charts.

We'll just note that the medium term technical outlook for the US and European indexes per their weekly charts remains overall bullish, either flat or moving higher in the near term, and thus supportive for the pair.

EURUSD Weekly Technical Outlook: Neutral Momentum, Strong Support Limited Medium Term Downside

EURUSD Weekly Outlook: Is Recent Price Action Showing Weakness Or Resilience?
EURUSD Weekly Chart Week of September 29 2013 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.
Source: MetaQuotes Software Corp,,

Key Take-Aways Weekly Chart:

1.375 support area broke, 1.37 zone bending but not broken at the pair closed the week at 1.3696.

While the pair remains in its 14 week trading range, the medium term momentum is neutral as the pair remains firmly within its neutral double Bollinger ® band zone. Friday's drop suggests at least a test of deeper support around 1.365. If that breaks, the next big support is around 1.36 -1.355, buttressed by four layers of support:

-The round 1.355 figure itself

-The green uptrend line dating from mid-2012

-The 50% Fibonacci retracement of the downtrend from mid-2011 to mid-2012.

-The 38.2% Fibonacci retracement of the bigger downtrend from July 2008 to June 2010

These can be seen on the EURUSD monthly chart which we posted last week here.

EURUSD Daily Technical Outlook

ScreenHunter_03 May. 17 22.25
EURUSD Daily Chart April 9 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.
Source: MetaQuotes Software Corp,,


Key Take-Aways Daily Chart

The only real movement came on the drop following Tuesday's news that the Bundesbank supported further easing.

After Wednesday's mild bounce and Thursday's indecisive doji, Friday's lower close suggests that trader's see a test of deeper support to around 1.365, which is buttressed by:

  • The psychologically important 1.365 round number
  • The 200 day EMA (violet)

All momentum indicators on daily charts tell the same story of strengthening downward momentum. For example, the pair remains firmly in the double Bollinger ® band sell zone on the above daily chart


Here's the short version.

The primary fundamental drivers of the pair's continued downtrend were variations on the same themes as last week:

  • Rising speculation about ECB easing. In addition to Draghi's comments from last week, Germany's central bank signaled its support for further easing. Bundesbank officials claimed they had not changed policy, and that they were always open to easing if EU data continued to weaken.
  • Continued weak EU data, particularly in comparison to that of the US, supported the above speculation.
  • Also similar to last week, key support levels continued to define the extent of the pair's decline. Last week the pair stabilized at near term support around 1.3750. After the Bundesbank remarks Tuesday the EURUSD began testing the next major near term support level around 1.367. After attempting a recovery, weak inflation and CPI data Thursday spurred a further test towards deeper support into the end of the week.
  • Despite all of these negatives, the EURUSD's decline looks more like a demonstration of resilience than a coming reversal, as each of the above waves of bad news have brought only incremental pullbacks to the next levels of near term support and overall only a minor pullback. Here's why:
  • Given the 14 week narrow trading range and stability of long term drivers, near term support and resistance are limiting volatility.
  • The consensus is that the coming ECB easing steps will be relatively conservative and avoid any US-style QE, as discussed in more detail below. However given how low rates are already, such cuts are unlikely to encourage new lending and thus lift inflation, especially given the coming ECB bank stress tests, which encourage banks to hoard cash rather than lend it

That said, there was a good bit more to know about the EURUSD's outlook for the coming week and beyond, see below for details.

The Bullish

US benchmark 10 year Treasury note yields remain mired around 2.5%, limiting the USD's appeal despite coming ECB easing. Looking out the curve per Fed Fund futures (derivatives that help measure sentiment on future Fed policy), the first hike is not fully priced in until October of 2015, rather than the Fed's forward guidance date of April 2015. So any USD rate advantage is believed to be 6 months further out than Fed forward guidance.

The weak US rates suggests a flight to safety, but who are the buyers? Some suggest they're sellers of GIIPS or other EU bonds, yet rates for these are not climbing.

Although a late-2015 hike is a weaker than guidance, the USD's rate outlook is still more hawkish rate outlook than that of the Euro, never mind the Yen (the BoJ is not yet winding down its open-ended QE) and many other counterparts. That said, it's too far in the future to influence the pair in the coming months.

Even with the very EUR bearish data and ECB easing (never mind the excessive complacency regarding the potential for a new EU crisis) the EURUSD's decline has been modest, about 2%. Indeed, given continued demand for EU assets, and Fed dovishness, the recent decline could be seen as much as a proof of the pairs' resilience as a sign of coming topping. Until we see a confirmed break below 1.35 we continue to view the recent drop as just a normal bull market pullback rather than a topping out.

The Mixed

On Friday Portugal exited its bailout program, three years after requesting a €78B ($107B) rescue.

  • The good news is that this feeds the virtuous cycle of optimism about GIIPS bonds, and their declining borrowing costs.
  • The potentially bad news is that Portugal no longer answers to the Troika and is free to yield to the temptations of backtracking on reforms, such as lowering taxes while raising spending, reducing the costs of hiring and firing workers, etc. Of course Prime Minister Passos Coelho promises to maintain fiscal responsibility and financial stability. However the economy is a long way from recovery. Per asset manager Diogo Teixeira: "There will now be two or three decades of lean times for the state, which will have to purge that debt burden" (of €214B, $293B)), which he claims is heavy but sustainable. Portugal's economy contracted in Q1 of this year, so it's on the brink of recession (defined as two consecutive negative quarters). The temptations to slow or reverse the reforms could be strong, as politicians struggle to consider policy ramifications beyond their anticipated term in office.

The Bearish

Another Bearish Sign For Risk Appetite And Thus The EURUSD: David Tepper Comments

Remember, he was one of the most famous 'don't fight the Fed' fund managers to go long when QE started and while others were too nervous to be bullish. So when founder of Appaloosa Management David Tepper talks, people listen, and when he says he's nervous, they really listen. This past week at SkyBridge Capital's SALT conference in Vegas he reiterated (and thus reinforced) a growing nervousness among stock investors:

"I'm not saying go short, I'm just saying don't be too fricking long right now... There's (sic) times to make money and there's times not to lose money. This is probably (a time when) you're supposed to think about preserving some of your money ... I think it's nervous time."

His reasons included the already widespread concerns about slow or slowing growth in the US and Europe (we'd add China, Japan, and most other major economies) as well as the ECB's failure to act sooner against deflation.

Right or wrong, his comments were quoted all over the financial media on Wednesday. Given the lack of meaningful news that day, they may have been as much a reason as any for US and EU stocks to finish slightly lower.

ECB, Bundesbank, Feed Bearish ECB Easing Speculation

From Friday through Monday the pair stabilized into a tight trading range with support holding around 1.375, supported by the 100 day EMA, as the effects of June ECB easing speculation appeared to have been priced in for the moment.

Then on Tuesday it was reported that the one remaining source of meaningful opposition, Germany's Bundesbank, was comfortable with the ECB announcing new easing measures at its June meeting.

That was enough to start the pair's next leg lower. As of midday Wednesday support around 1.37 held firm, and the pair began a recovery bounce, due to a combination of:

  • A normal "self-fulfilling prophecy "tendency to anticipate a bounce at the significant 1.37 level, which was encouraged by...
  • USD rally lacking follow-through due to weak US retail sales data, and the downward revision of US Q1 GDP undercut the nascent USD rally.

On Thursday the big story was growing anticipation of bolder ECB easing steps, as shrinking GDP and inflation data fed speculation of more easing than previously expected. Official comments and press reports, as we noted in our mid-week EURUSD outlook, continue to suggest a mix of rate cuts rather than QE-style bond purchases. For example, a Thursday report in Spanish newspaper La Vanguardia speculated that the ECB will cut its deposit rate to -25bps at the next meeting in June and will also lower the lending rate to 15bps.

No Easy Choices: ECB's Likely Easing Steps For June

As we've discussed in earlier posts, each policy option has its downsides. For example, negative deposit rates for banks could push EU banks to:

  • Pass on costs to clients, which would act like an additional tax and cut business and consumer spending, feeding the very deflation the ECB wants to defeat, or
  • Absorb the costs and weaken their balance sheets ahead of ECB stress tests.

The consensus of analysts, based on EU officials' comments, is that the ECB's coming easing steps could include a reduction in both the refi rate and in the deposit rate, an end to SMP sterilization (as we warned it would eventually need to do here) and new LTROs.

A few years ago any one of these measures could have sent euro sharply lower. However in an environment of already near-zero interest rates, the potential impact on the euro and EZ from more rate cuts is mostly spent. This fact alone may explain much of the gradual, controlled nature of the EURUSD's pullback thus far.


Weak EU Economic Data Pressures ECB For Bolder Easing, Pressuring EUR

As we noted in our weekly EURUSD outlook, last week's weak German export data and inflation data had already suggested that Germany would be more open to further easing. This week's poor German ZEW reading, as well as falling German and French inflation data, further suggest German acceptance of some easing measures.

Thursday's weaker than expected EU GDP (0.2% versus 0.4%) and CPI forecasts (0.7%, unchanged and in line but still stubbornly below the 2% ECB target as well as continued reports and speculation about the extent and type of ECB easing in June kept up the downward pressure, sending the pair below 1.365, testing support of the 200 day EMA before recovering.

EU GDP would have been worse had it not been for Germany's better than expected Q1 GDP q/q reading (0.8% vs. 0.7%). Except for Spain, other largest EZ economies that contribute over 80% of the EU's GDP are either stagnant or contracting. France (0% vs. 0.4%) and Italy (-0.1% vs. 0.2%) are both teetering at the brink of recession. Italy is already contracting, and even more so is Portugal, (GDP -0.7% vs. 0.1%), after growing +0.60% in Q4 of 2013. Dutch Q1 GDP was -1.4%. Finland is mired in recession, posting -0.4% GDP. Finland hasn't had a positive quarter of growth since Q1 of 2012.

German Performance Gap Concerns

That strong difference between German GDP and the rest of the EZ highlights the EU's structural obstacles. Growth is very unevenly divided, yet there is no clearly established transfer mechanism to shunt cash into weaker areas, a key feature of an optimal currency unions like the US, where wealthier states contribute more in taxes paid to Washington than they receive.

That performance gap also contradicts the widely held assumption that German prosperity should trickle down to its neighbors. Indeed, many question whether Germany's economy, with its large external surplus, to some extent is preventing an even recovery across the EZ.

These figures fuel rising expectations for the extent and pace of the coming new stimulus from the ECB, as noted above.

ECB's Mixed Message To EU Banks: Lend, But Be Ready For Stress Tests

Both of these measures would encourage banks to lend rather than hoard cash, as many are doing in preparation for the coming ECB bank stress tests. Indeed, one of the most interesting questions for the weeks ahead is how the ECB will try to encourage banks to lend more while at the same time continue with its scheduled bank stress tests.

As we've noted in recent posts, the ECB appears to have prioritized increased lending and higher inflation, as it has cut bank stress test standards.

This choice is understandable, given the EU's failure to provide a plan to support banks that the tests would find undercapitalized. It's banking union plan, as underfunded and slow to implement as it is, won't even start until after the stress tests are completed. That leaves too big to bail and fail Spain and Italy to deal with their banks without any pre-arranged backup. In 2012 Mario Draghi's promise to "do whatever it takes" and OMT plan succeeded in calming markets. They were so successful that neither his promise nor the program was ever tested. The good news was that these succeeded in calming markets and bought the EU time. The bad news is that these remain untested and the EU has yet to show it can reform itself, as the inadequate EU banking union deal showed. See here and here for details on its dangerous flaws.

In the end the ECB appears determined to get banks lending, and is prepared to deal with the risk of weakening banks' capitalization, and failed stress tests, via a combination of reduced stress test standards and ad-hoc last minute solutions.

Meanwhile The US Continues To Outperform The EU Keeps Fed And ECB Moving In Opposite Policy Directions

Although US data has also been a mixed bag, it still has outperformed the EU. In stark contrast to the EU, US inflation (both PPI and CPI) and weekly jobless claims beat expectations, as did the Philly Fed manufacturing index. If we stripped out German data, the EU would look even worse.

Although US data has its weak spots, the key point is that US data remains good enough to keep the Fed moving towards tightening , while EU data continues to push the ECB into further easing.

Indeed, CPI is on track to hit 2% for the year, the Fed's target rate. If it goes higher, that would get markets speculating on a faster tightening that would further pressure the EURUSD.

Eurocrats Continue To Discourage Investment

The EU is already known as a regulatory minefield for foreign firms at time when it needs their investment more than ever.

French Prime Minister Manuel Valls signed a decree allowing France to block foreign takeovers of French firms in the energy, water, transport, telecoms and health sectors. The move risks deterring foreign investors from doing business in France at a time that it's economy is stagnating. The immediate motive is to give France more say in the potential sale of Alstom's (ALSMY) energy assets to GE (GE) or Siemens (SI).

Google has reportedly received requests from multiple EU sources, including from a politician seeking to suppress links to articles about him, to exclude links from its search results.

After a landmark European verdict on Tuesday that search engine companies can be asked not to display information that is deemed (by who?) old or irrelevant. This raises fears that Google (GOOG, GOOGL) and Yahoo (YHOO) will be deluged with requests. Both firms are trying to figure out how they're going to implement the seemingly vague ruling.

To Watch

Top EURUSD Calendar Events To Watch

The release of US FOMC minutes on Wednesday, and European flash PMIs Thursday are the events most likely to have a direct influence on the pair in a typically light late in the month week calendar. Beyond these, there are seven different Fed Presidents speaking, including Janet Yellen. However her speech is only a prepared commencement speech at NYU without any follow up questions from the audience, so it's likely to be the least potentially revealing of them all.




German PPI: If lower than expected, it could fuel ECB easing expectations as it might increase German support for easing measures aimed at eliminating the deflation threat.


US: Fed Chair Yellen speaks, and FOMC meeting minutes released. This is our big chance for the week to get an update on Fed policy thoughts.


China: HSBC flash manufacturing PMI. This is important for the pair insofar as it influences overall risk appetite, which the EURUSD generally tracks fairly closely (except in times of sudden ECB or Fed policy shifts, real or suspected).

EU: Flash German, French, and EU manufacturing and services PMIs. After last week's depressing GDP figures, these give us our latest update on the state of the EU economy, and an overall upside surprise could help restore hope for the EU and help undo some of last week's pullback.

US: Weekly new jobless claims, flash manufacturing PMI, existing home sales.


EU: German Ifo business sentiment survey

US: New home sales.


Biggest Questions & What To Watch To Answer Them

The biggest ones include:

  • The extent and scope of coming and future ECB easing
  • Whether the Ukraine crisis spurs a new round of risk aversion. There are other potential sources of risk off trade, like tensions with China or EU crisis issues, but thus far these do not appear to be imminent threats. That said, an escalation of tensions with Russia is the most likely source of trouble, particularly as the situation develops in Eastern Ukraine, and Ukraine's May 25 elections approach.

Sample Retail Traders Positioning

ScreenHunter_04 May. 17 23.38

Our sample retail traders continue with their shift from a firmly short to a slightly long overall position early May. Apparently they continue to believe in the 14 week trend and see the EURUSD's moves towards the lower end as a time to prepare to play the bounce higher, despite the risks of fighting the short term trend. The longer term trend per the weekly charts, as noted above, is neutral, as is the momentum. That fact does support the idea that the 14 week trading range remains valid and that the odds favor a move higher within our groups' average 8 week holding period. This shift is already a week old, but the pair hasn't dropped that much, so losses for even the early entries remain limited and don't suggest a short squeeze.


Conclusions: Just A Technical Pullback Or Topping?

Despite near term challenges of ECB easing and weaker EU performance, the pair's pullback has been restrained. Unless the ECB announces bolder easing than currently expected, we continue to view the past weeks' reversal as a normal technical pullback within a longer term uptrend rather than the start of a topping process or reversal.

To change our mind, and make us EURUSD bears for the coming week and beyond, we'd need to see:

  • On the fundamental side, a new USD interest rate advantage and/or anticipation of that advantage in the medium term. Ways that might happen include:
  • Some indication from the ECB that much more easing is coming soon than previously expected, and includes more radical easing than the consensus noted above.
  • An indication from the Fed, or US data, that US tightening and rising rates are coming sooner than mid-2015. We'd focus our attention on evidence of declining slack in US jobs and the potential for rising inflation.
  • On the technical side, a confirmed break below 1.35.

To be added to Cliff's email distribution list, just click here, and leave your name, email address, and request to be on the mailing list for alerts of future posts. For information on a free intro to currencies video course based on my award winning book, see here.


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