by Cliff Wachtel, FX Empire
FX Traders' weekly EURUSD fundamental & technical picture, this week's market drivers that could change it- the bullish, the bearish and likely EURUSD direction.
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.
- Technical Outlook: Short Term Neutral, Medium Term Bearish
- Fundamental Outlook 1: Ukraine Escalation Set To Dominate Markets?
- Fundamental Outlook 2: If Ukraine Calms, EU Data Key
- The Big Question: Ukraine Escalating, And If So, Is It A Game Changer?
The short term technical picture suggested we might see a near term bottoming before the longer term downtrend, suggested by our technical indicators, resumed. Will escalating military conflict accelerate the pairs' decline?
TECHNICAL OUTLOOK: Overall Risk Appetite Per Leading Global Stock Indexes
We skip this section this week because the modest bounce in risk appetite as reflected by the week's bounce in the indexes does not help explain the EURUSD's movements, as the usual positive correlation between the indexes and the EURUSD broke down last week.
Why? Both the indexes and the EURUSD reacted to the same developments in opposite ways. Specifically:
- Stocks were up mostly on a combination of a modest easing geopolitical fears and a 'bad news is good news' reaction to poor data worldwide, which had investors anticipating new or at least continued low rates from central banks.
- The EURUSD dropped on continued recognition that the ECB is much more likely to enact EUR-dilutive easing than the Fed, which is either going to keep policy steady or tighten a bit, with rates beginning to increase sometime between late 2014 to late 2015, as well as a belief that economic damage from Ukraine-related sanctions is far from over and will reinforce EU economic weakness and the ECB's dovish stance.
Thus index movements don't help us explain EURUSD price action.
EURUSD Weekly Technical Outlook: Short Term Neutral Longer Term Bearish
EURUSD Weekly Chart July 22 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
Key Take-Aways Weekly Chart: Bounce or Key Support Breaking? Next Levels To Watch
Continuing the theme of the past 5 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 continued its slow grind down within its descending channel from May after a 5 week breakout above it.
The most outstanding change for the worst is the second straight weekly close below the last and strongest moving average, the 200 week EMA around 1.342. This second straight weekly close below it, along with a continued drop below it, brings us closer to calling a breakdown of this very significant support level.
As the oldest of our EMAs, such a confirmed breach takes real conviction among traders that the EURUSD is headed lower. The fundamental drivers of that conviction are clear, the poor EU economic data of the past week and continued potential for slowing growth from escalating military and economic sanctions activity. See our fundamental analysis for more on that.
That said, the weekly price action just wasn't strong enough for us to declare support at the 200 week EMA around 1.342 officially broken yet:
- The EURUSD was essentially flat for the week despite bad data and the threat of more bad news from the Ukraine crisis.
- The close at 1.3399 is close enough to the 1.342 support level to consider this level merely bent but not yet decisively broken.
- The week's candle is the second indecisive doji in three weeks, during which time the pair has only fallen about 260 pips.
In sum, one could still make a case that the pair is bottoming, though we would disagree, as both the technical and fundamental medium term picture remains overall bearish, especially in light of continued strong downward momentum on the above weekly chart, as we detail below.
Here are the details of the key elements of the technical picture on the weekly EURUSD chart.
- 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:
- -We've a temporarily successful bounce off late January lows and drive a to new highs from December 2013 to March 2014
- -A pullback that bottoms in mid-June
- -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.
- -Violation Of Key Support: Over the past 6 weeks the pair has broken through no less than 4 strong support levels, within which were 6 key technical support indicators:
- -1.3575 area, which included the medium term 38.2% Fib retracement of the long term downtrend beginning August 2008 - June 2010 (white).
- -13560 zone, which also included the 50% Fib retracement of the medium term downtrend from May - July 2011 (yellow), and the 50 week (200 day) EMA (red)
- -The 1.3455 area, which included the 100 Week EMA (turquoise)
- -And now, the 1.3400 support area, which included the very significant 200 Week EMA (violet) continues to bend.
- -Accelerating Downward Momentum
- -All EMAs trending lower except for the longest term, least sensitive 100 and 200 week EMAs, which have flattened. The 20 week EMAs (yellow) are close to crossing 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...
- -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.
Likely Trading Range For The Week Ahead: 1.333 - 1.345.
Looking at both weekly and daily charts for the EURUSD:
- Upside limited to around 1.342 to 1.345 area, where it would meet resistance from prior week highs as well as from its 10 and then 20 day EMAs, along with its 100 and 200 week EMAs.
- Near-term downside appears limited to around 1.333, the lows of the prior 2 weeks, during which the pair has survived a growing stream of bearish data, geopolitical events, and ECB comments. More on these in our fundamental analysis.
- However there is really no significant intermediate term support showing on the weekly EURUSD chart until we hit the 1.325 area, where we've a convergence of both the 38.2% Fibonacci retracement of the uptrend that began in mid-2012 (yellow), and the lower edge of the descending channel (deep pink) that's been carved out since May.
- In the near term, there is plenty of reason to believe there will be an attempted short term bounce. Consider:
- On the daily chart, the pair's higher close on Friday puts it in its double Bollinger® band neutral zone.
- The indecisive weekly doji candle
- There was virtually no further net downward progress last week
- The already crowded EURUSD short position that makes the pair responsive to any kind of bullish news,
- That said, medium term momentum is overwhelmingly bearish and puts the odds in favor of a decisive break below the 200 week EMA another test of 1.333 in the coming weeks.
Concluding Thoughts: Medium Long Term Technical Outlook Strategic Summary
The theme of the current downtrend as evolved from one of "strengthening downward momentum versus strong support" to one of "downward momentum overwhelming final strong support." Although the flat close for the week should encourage at least an attempted bounce this week, a test of support at 1.333 appears to be just a matter of time. After that, there's no meaningful support until the 1.325 area.
As we cover in our fundamental analysis, the EURUSD's downtrend is more a reflection of the EUR's growing fundamental weakness in the EU rather than of any material strengthening of the US economy, which at best continues its fragile, mild ascent.
The recent violations of support and accelerating downward momentum open the way for a test of the next meaningful support level around the 1.333 zone, which provided support or resistance at many different times on the weekly EURUSD chart in 2013. After that, there's no meaningful medium term support until around the 1.330 - 1.3255 band, which includes both these psychologically important round numbers as well as the 38.2% Fibonacci retracement of the May 2011 July 2012 downtrend.
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.
Again, another down week that widens the distance from that 200 week EMA would bring the confirmed breakdown of support at the last big medium term support level. It would be a very significant display of conviction for EURUSD bears and of capitulation among EURUSD bulls. You don't sell around the 200 week EMA unless you really believe this downtrend has room to run.
Perspective Check: EURUSD Long Term Downtrend Since Mid-2008, Peaked At Start Of Great Financial Crisis
For perspective, remember that the EURUSD has been in a long term downtrend ever since July 2008, and its most recent highs of April 2014 were stopped cold by the already well-established downtrend line from mid-2008, as illustrated below.
EURUSD Monthly Chart 1 June 2005 to Present
KEY: 10 Month EMA Dark Blue, 20 Month EMA Yellow, 50 Month EMA Red, 100 Month EMA Light Blue, 200 Month EMA Violet, DOUBLE BOLLINGER BANDS: Normal 2 Standard Deviations Green, 1 Standard Deviation Orange. Deep pink downtrend line from EURUSD monthly opening peak of July 2008 to present.
Source: MetaQuotes Software Corp, www.fxempire.com, www.thesensibleguidetoforex.com
Fundamental Outlook: Ukraine Escalation Set To Dominate Markets?
As we go to publish this Saturday night GMT, an escalation in the Ukraine crisis appears set to dominate markets in general and the EURUSD in particular.
First we'll look at what drove price action last week and attempt to discern some lessons. Then we'll look at the likely top EURUSD price drivers for the coming week.
Last Week's Top Market Movers: Technical Support/Resistance More Influential Than Data
First, the term 'market mover' is rather relative in a week in which the pair hardly moved. So we'll look at what was behind the daily movements and attempt to discern some lessons from them.
As shown above, the pair's major moves lower were on Monday and Tuesday, nothing moved it Wednesday, and Thursday, then it popped higher Friday.
What were the primary market drivers behind these moves?
Monday: "Technical Bounce"
There were no obvious drivers, so given the pair's bounce late last week to near term resistance was likely just a technical move, i.e. short term buyers taking profits or opening new short term shorts, or, (just as likely) no clear reason, random noise caused by a few big sells unrelated to any news. No one else seemed to be offering any reasons either, as major daily commentary suddenly shifted to longer term issues for the pair (a common shift of topic when daily price action has no clear explanation).
Tuesday: Events At Least Provided Some Plausible Reasons For Additional Selling
Both German and EU ZEW sentiment readings came in far lower than forecasted, reminding traders that there is a great deal of concern about the potential economic harm of an escalation in military and economic sanctions activity related to the Ukraine crisis, as well as the generally weak stream of EU economic data, with more of the same sad story expected from Thursday's GDP, jobs, and inflation data from Germany, France, and the EU. The EUR's slump following the German ZEW release confirms that the survey result moved the pair for the day.
In addition, the CEO of German consumer goods giant Henkel said: "We expect the escalation of the Russian Ukrainian conflict as well as the persisting political turmoil in the Middle East to have a negative impact on the market environment." As noted above, EU stocks rose on this news because it suggested more ECB easing, which has been one of the two big drivers of higher EU stock prices (the other being the absence of any major risk off events, particularly a new leg of the currently dormant but alive EU crisis.
Some job data from the US (NFIB small business index) and JOLTS job openings) suggested there was less slack in US labor markets than believed, supporting an earlier Fed tightening, so these data points might have supported the USD and augmented the EURUSD's move lower.
Wednesday And Thursday: Biggest Data, Least Movement
Everyone in the EURUSD weekly forecast business expected Wednesday and Thursday to hold the most potential for volatility, however the pair was virtually flat both days. Equally surprising, a look at the daily price action shows that despite the almost uniformly negative data, on both days the pair probed far higher than it did lower, attempting a sell the news bounce. The pair shrugged off such negative news as:
- US retail sales came in way below forecast. Granted, that should weaken the USD (as it keeps the Fed dovish) and thus bolster the EUR, however it also hurts general risk appetite, and as a rule that's a distinct negative for the EUR.
- German and French quarterly GDP both came in under forecasts, with Germany contracting even more than expected and France flat at 0% for the second straight quarter. Not surprisingly, General EU GDP also missed expectations as all of the top economies are sputtering (#3 Italy relapsed into recession last week).
So why no movement? Most likely reason was a involves a convergence of
- -prices hitting near term support already and
- -the fact that the misses weren't large, and
- -EUR short positions were at a two year high, which means we may be running out of sellers in the short term. Indeed, Friday's bounce on little news lends weight to that idea. If all that bad news couldn't push the EURUSD lower, short term traders would be tempted to close shorts or attempt to buy the bounce
Friday: The bounce appears to be mostly a technically driven as traders saw support holding for the past three days around 1.335 despite a lot of negative news, so they were waiting for an excuse to go long. We suspect the drop in 10 year US note yields and mixed US data Friday provided that excuse.
So what did the above price action teach us? That the economic events of the weekly calendar provided no meaningful surprises to change the thing that really matters - sentiment on ECB and Fed policy. Hence the near term technical support and resistance levels kept trading to a narrow range.
Likely EURUSD Market Movers To Watch This Week
EU Data? Only If Ukraine Situation Calms
So what events have the potential to change investors' views on where these central banks are headed? First, remember that the Fed is expected to move towards higher rates, while the ECB is expected to continue easing, the only question for both banks is the pace of their expected policy shifts.
Economic data for the US has been mixed but continues the theme of slow but steady recovery, which isn't enough to justify accelerated Fed tightening.
Meanwhile EU data continues to show little else but further deterioration.
The past two weeks have shown that the top two economies, France and Germany, have stopped growing, (Germany actually contracted), so there's real weakness in the very core economies. Meanwhile, 2 weeks ago #3 Italy printed its second straight negative GDP figure and is now officially in recession yet again, and deflation remains a threat.
Therefore the most likely market moving news for the EURUSD will be something that raises expectations for change in policy is more ECB easing, so the focus stays on EU data. The EU events with the most potential to fuel higher expectations for further ECB action are:
- Thursday's batch of manufacturing and services PMI reports
- Friday's speech by ECB President Draghi, though this comes late in the day after European markets have mostly closed, so the impact of any surprises might not be felt until the following week.
The ECB's next easing step, some kind of QE, is not expected to come soon because the effects of the current easing steps have yet to be fully felt. However, falling bond yields for not only Germany, but also others EZ members like Italy and Belgium, may point to rising expectations for QE, because that would drive EU yields down across the board. Indeed, note how Spanish yields have been falling at about the same pace as Germany's.
In other words, falling German yields could be attributed to simple safe-haven demand. However the fact that other, less credit worthy nations are also seeing falling yields suggests something other than flight to safety demand - that QE expectations are rising.
Ukraine Crisis Escalation Set To Dominate Markets
Of course, the biggest potential EURUSD driver is obviously any escalation or de-escalation in the Russia-Ukraine crisis. On Saturday both Reuters and FT.com reported that Russian separatist forces are receiving an influx of soldiers and equipment, including armored troop carriers and tanks.
These confirm earlier reports from Ukraine that its forces had engaged Russian armored forces.
So much for hopes of calming tensions in the region. Instead, markets are likely to open Monday with an attempt to factor in rising risks of economic damage from an escalation in both military action and economic sanctions.
If in fact Russia is openly stepping up increased support for the separatists, that fact alone will dominate markets and undermine the influence of scheduled calendar events. Noted above and below.
Top Calendar Events To Watch
As noted above, this week's calendar's main action happens Thursday, with the big EU data dump and ECB President Draghi's speech. As always, the top tier China data listed below could influence overall risk appetite, however Russia's reinforcing of its proxy army of Ukrainian separatists over the weekend appears to signal yet another escalation in the crisis. In recent weeks, sentiment about economic risks stemming from Ukraine has been THE market driver, overwhelming all else.
If in fact Russia is now openly supplying the separatists, this news will be the big bearish force of the week that will pressure risk assets, including the EURUSD.
US: Building permits, CPI, housing starts
US: FOMC meeting minutes
China: HSBC flash mfg PMI
EU: French, German, EU flash mfg and services PMIs
US: Weekly new jobless claims, existing home sales, Philly fed mfg index
All: Day 1 of 3 of Jackson hold symposium (has been a venue for major Fed announcements, none anticipated, however.
US: Fed Chair Yellen Speaks
EU; ECB President Draghi Speaks
All Day 2 of 3 of Jackson Hole symposium
All Day 3 of 3 of Jackson Hole symposium
The EURUSD short position has become a crowded one per COT reports put out last Tuesday. However our real time sample of retail traders continues to attempt to fade the multi-month downtrend in anticipation of a bounce. If the Ukraine conflict is heating up, they'll have to wait longer, or close their long positions.
Biggest Questions & What To Watch To Answer Them
Is Russia increasing support for its proxy army of Ukrainian separatists and showing a new determination to annex yet another chunk of Ukrainian territory? If so, risk assets in general, and the EURUSD in particular, are likely to end the week lower. The West will need to choose to either give up (either openly or by simply continuing with mostly toothless sanctions) or to continue with another round of economic sanctions that threaten to scare markets and rattle Europe's already fading recovery.
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DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.