- Bullish share in the SWFX market is 46% as the longs regained one percentage point over Tuesday
- Pending orders remain in the bearish territory in both 50 and 100-pip ranges from the spot
- Dovish Fed could help EUR/USD in regaining area around 1.10
- Technicals on a weekly basis expect the pair to depreciate; neutral outlook on a daily basis
- Economic events to watch in the next 24 hours: French Consumer Confidence (Jan); Italian Consumer and Business Confidence (Jan); US New Home Sales (Dec) and Crude Oil Inventories (Jan 22); FOMC Interest Rate Decision, Monetary Policy Statement, Pace of MBS Purchase Programme and Pace of Treasury Purchase Programme
The Australian Dollar advanced and any chances of an interest rate cut by the Reserve Bank of Australia were dissipated after December quarter headline inflation beat market's expectations. According to the Australian Bureau of Statistics, consumer prices climbed 0.4% from the third quarter and 1.7% from a year earlier. Economists, however, had predicted gains of 0.3% and 1.6% respectively. Prices for tobacco and holiday travel contributed the most to the inflation increase, whereas petrol, telecoms and fruit showed sizeable declines. Moreover, the disinflationary pulse from declining oil prices is far from over. Last week national petrol prices plunged over 5% in the biggest decrease since late 2008. Weak inflationary pressure and an economy with spare capacity led the central bank to keep its cash rate unchanged at 2% in December. However, turmoil in global financial markets and concerns about China's hard landing, Australia's key trading partner, have forced investors to bet on at least one more rate cut. Interbank futures imply very little chance of an easing a the RBA's next policy meeting on February 2. However, a 25-basis point move to 1.75% is almost fully priced in by August. As a commodity-reliant economy, the recent plunge in oil prices and resultant weakness in the Australian Dollar helped exports to rise sharply and the central bank hopes to spur demand with low interest rates.
German business confidence dropped for a second month in a row in January to the lowest level in almost a year, with manufacturers and construction companies becoming more pessimistic about the outlook for their businesses. The Ifo's institute's business climate index, based on a monthly survey of some 7,000 firms, declined to 107.3, down from a revised 108.6 last month. German manufacturing has been feeling ill winds stemming from a slowdown in global trade, with China's weakest economic growth in more than two decades sending markets into turbulence and urging the International Monetary Fund to downgrade its outlook for 2016. The German government predicts the nation's economy to expand 1.8% this year. German companies may feel some comfort from the European Central Bank President Mario Draghi's comments last week, signalling that the central bank had plenty of tools at its disposal to stoke Euro zone's inflation and was both determined and willing to act. In the meantime, Draghi highlighted that the ECB should fulfil its inflation mandate in order to keep its credibility. ECB policy makers gather on March 10, when they will weigh whether the 1.5 trillion-euro QE programme and negative interest rates are sufficient to meet the inflation goal of just under 2%.
Upcoming fundamentals: It's a Fed day!
The outcome of January FOMC meeting is quite clear for everyone in the market – the Fed is not going to increase interest rates this time. Probability of another hike is approaching zero, according to Fed Funds futures market. The decision to move rates this month has not been already projected since previous FOMC meeting in December when they released a dot plot with 2016 hike expectations. With four annual rates increases still on the table, the earliest possible change is likely to take place in March. Given that global equity and commodity markets remain in a turmoil mode, the Fed might indicate it will postpone rate increases until summer. However, analysts assume the regulator will avoid the situation of ruling out the March hike, as we are still six weeks to go until that meeting. The policy statement will be an important tool for communicating with markets and they are looking forward to it, to eventually boost volatility by the end of US session today.
EUR/USD in wait-and-see mode before Fed
The pair fluctuated within the range between two moving averages on Tuesday, namely 20 and 55-day SMAs at 1.0869 and 1.0829, respectively. Tranquil trading is explained by expectations of the Fed meeting, and this fact is confirmed by falling trading volume. Dovish statement later on Wednesday will make the Euro quite buoyant today, with the short-term target being unchanged near 1.0960/80 (Bollinger band; 100-day SMA). Meantime, support will continue to be offered by a dense demand area above 1.08. Any break out below here should trigger a selloff down to 1.0715 (January lows).Daily chart
The bulls are still focusing on 200-hour SMA in the one-hour chart. This resistance line, currently at 1.0872, is putting some downside pressure on the most traded FX cross. Gains above here will reopen the Jan 15-20 downtrend near 1.0960 and general January uptrend some 30 pips more to the upside.
Hourly chart
Sentiment and pending orders maintain bearish views
In the meantime, EUR/USD's market sentiment at OANDA is the least positive among major currency pairs at the moment, as only 41% of all their clients are betting on the Euro's increase in value. Alongside, almost seven out of ten SAXO Bank traders are bearish on this cross, given that they have traditionally been more skeptical on this particular matter.
Spreads (avg,pip) / Trading volume / Volatility
68% of Dukascopy Community members are now looking for losses of the Euro vs US Dollar
This week the overall sentiment on the EUR/USD cross deteriorated again. The majority of Dukascopy Community members are now waiting for the Euro to decrease, even though the opposite sentiment had been observed a week before. The average prediction for February 1 is located around the 1.08 level.
Among traders, Blacklightning assumes that a lot will depend on the European Central Bank. He says that "Draghi sends a signal of potential easing in March. In the short-term I would expect EUR/USD to reach levels between 1.04 and 1.032. I also expect that the ECB will postpone further easing during March meeting, as it is too early to act and stock markets will fall further after the brief rebound. Therefore, for this calendar year I see EUR/USD not below 1.03 and, as result of stock market decline, as high as 1.20-1.22."