EUR/USD confirms uptrend to the downside

Source: Dukascopy Bank SA
  • 53% of all SWFX traders are now long on the Euro, the biggest share in 14 weeks
  • Pending orders are on the bearish side for a sixth consecutive day
  • To confirm bearish intentions, the pair should trade below 1.0935 throughout Tuesday
  • Indicators are mixed, as daily ones are bearish and weekly studies want to see a rally
  • Economic events to watch over the next 24 hours: Euro zone Manufacturing PMI (Feb); German Unemployment Change/Unemployment Rate (Feb); Euro zone Unemployment Rate (Jan); Italian GDP (2015); US ISM Manufacturing PMI (Feb)

© Dukascopy Bank SA
Data from the Euro zone has considerably missed market expectations on Monday, as inflation in the common currency area slumped back into the negative territory of -0.2% in February. This number followed a series of disappointing inflation figures from major countries in the bloc including Germany, Italy and Spain. Economists had anticipated before the release that the CPI would ease from 0.4% in January to 0.1% last month. On top of that, core inflation slumped from 1% to 0.7%, meaning there has been a general slowdown in price growth even without the energy component. On the positive side, however, German retail sales jumped more than estimated in January by 0.7%. Nonetheless, it failed to underpin the Euro and this currency retreated across the board but against the New Zealand Dollar. EUR/NZD has in turn added three basis points over Monday. The most noticeable decline was posted versus the Yen (-1.69%), as the safe haven kept acting as a shield against global instability surrounding China and other emerging markets.

The Euro zone's inflation turned negative in February, boosting expectations that the European Central Bank will deploy additional stimulus measures at its next policy meeting on March 10. According to Eurostat, prices across the 19-nation currency bloc declined 0.2% in the year to February, following the 0.3% rise in the preceding month. The decline was largely due to a steep drop in energy costs, which plunged 8% in the twelve months to February after the previous month's decline of 5.4%. Moreover, the core rate, which excludes volatile items such as energy, food, alcohol and tobacco, was soft too, sliding to 0.1% from 1.0%. Falling oil prices, coupled with slowing economic growth in China and other emerging economies are weighing on the headline rate of inflation. Earlier this month, ECB President Mario Draghi insisted that the central bank's policies were working and the ECB stood ready to act if more efforts is needed. Meanwhile, a separate report showed German retail sales rose in January from December, marking a strong start to the year. Retail sales increased 0.7% in the reported month, following an upwardly revised 0.6% rise in December, Destatis reported. Measured on an annual basis, retail sales, however, declined 0.8%.

The Reserve Bank of Australia left the official cash rate unchanged after assessing an effect recent global financial turbulence has had on domestic growth, but kept doors open for further monetary policy easing if economic conditions worsen substantially. The central bank kept the cash rate at record low of 2%, a decision which was widely expected by economists. While weak inflation has provided the RBA with scope to ease monetary policy further, the Governor Glenn Stevens decided that strong employment and prospects for growth meant the bank could use its toolkit when a strong necessity arises. In 2015, the Australian economy created the most jobs in nine years, pushing the unemployment rate below 6%-6.25%, overshooting the central bank's predictions. On the international outlook, the RBA reiterated its mixed outlook for China's economic growth moderating, while other advanced economies have enjoyed a more strong performance over the past year. Meanwhile, Australia's current account deficit widened the most in 15 years in the December quarter. The current account shortfall expanded from $18.8 billion in the third quarter to $21.1 billion in the three months through December.

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Upcoming fundamentals: Euro area's production sector to expand slowly



According to mean analysts' expectations, only Italian and Spanish manufacturing PMI numbers will be revised on Tuesday. The former, due to be released at 8:45 GMT is set to be upgraded to 52.3 points for February, up from 52.2 points in the preliminary outlook. On the other hand, Spanish PMI reading (8:15 GMT) is forecasted to be downgraded to 54.5 points from 55.4 earlier. This is unlikely to put any pressure on the pan-Euro zone manufacturing PMI, which is projected to hold ground at 51 points in the second month of 2016. In the meantime, Euro area's unemployment data will be due at 10:00 GMT. The official jobless rate for the currency union is expected to remain flat at 10.4% for January, but this indicator has been a subject to positive surprises over the last months of 2015.


EUR/USD ready to test up-trend at 1.0930

Pessimistic inflation statistics from the Euro zone used to have a direct negative impact on the Euro on Monday, even though the currency attempted to remain above 1.0930 in the first part of the day. Eventually, it closed at 1.0872 and kept the weekly S1 intact. The two-month uptrend line is now violated and we are awaiting consolidation today. Bullish hopes are being limited by both 55/100-day SMAs at 1.0935/67. In the meantime, a drop of EUR/USD under the first weekly support is expected to cause another round of a sell-off down to the February low of 1.0809 over the next 24 hours.

Daily chart
© Dukascopy Bank SA

Even despite trading close to the lower boundary of the broadening falling wedge pattern in the 1H chart, EUR/USD refrains to cross this line for the moment. Some attempts were in place on Monday, but bearish pressure failed to be confident enough. We are still looking for an increase in the direction of 1.1040 where the upper edge of the pattern lies right now. Before that, the pair will have to assure the market that it is able to come back above the two-month uptrend located at 1.0963.

Hourly chart
© Dukascopy Bank SA

Traders become more optimistic on the Euro

The percentage of long positions in the SWFX market grew to 53% by Tuesday morning, the highest level in almost 14 weeks. Over the course of last two weeks the bullish traders have been consistently building ground at the expense of their bearish counterparts, therefore clearly showing intentions to reverse general mood of the market from negative to positive on the Euro. Nonetheless, pending orders continue assuming the Euro will depreciate against the Dollar, albeit the shorts' advantage amounting to only 4-10%.

While the gap between the bulls and bears has widened in the OANDA market from 0.60% yesterday to almost four pp on Tuesday morning, SAXO Bank market has seen a squeeze in difference. The portion of short clients dropped below 57% with SAXO Bank, as yesterday is stood above 58%.












Spreads (avg,pip) / Trading volume / Volatility



Average forecast says EUR/USD will trade at 1.12 by May

Meanwhile, traders, who were asked regarding their longer-term views on EUR/USD between Feb 1 and Mar 1 expect, on average, to see the currency pair around 1.12 by the end of May. Though the majority of participants, namely 60% (+2%) of them, believe the exchange rate will be generally below 1.14 in ninety days, with 43% (+2%) alone seeing it below 1.10. Alongside, 28% (-2%) of those surveyed reckon the price will trade in the range between 1.14 and 1.20 on May 31.

© Dukascopy Bank SA

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