Euro currency gains could be capped as focus turns to Germany

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Last week’s ECB meeting, although guarded in some aspects made it clear to the markets that the ECB will be announcing its taper decision at the October meeting.

The strong rally in the common currency this year suggests that the markets already know the outcome of the next meeting.

In a way, the euro is uniquely positioned which is also favorable to the ECB. At the July meeting, the minutes of the monetary policy meeting showed that officials were somewhat concerned about the market expectations.

However, this seems to have been cleared with economic data backing up the ECB’s decision which will be taken in October.

ECB meeting removes some uncertainty for the euro

With the uncertainty of the ECB now out of the way at least until October, and recent economic indicators showing that growth momentum remains largely stable alongside inflation rising steadily, investors are likely to take a break from the euro rally ahead of the German elections due later in September.

The German elections, unlike the Dutch and French elections, looks a lot safer. Angela Merkel has managed to consolidate her position as she remains confident to win another four-year term in the Bundestag. Still, investors are not going to take the elections lightly, and some cautious trading might be in order.

Angela Merkel’s Political Ups and Downs: 12 Years as a Chancellor [Timeline]

FOMC meeting unlikely to drive the US dollar

Between now and the September 24 elections, the only remaining uncertainty is from the Federal Reserve. However, no rate hikes are expected at this month’s FOMC meeting. The question remains on how the markets will react to the expected Fed announcement of balance sheet normalization.

Last week’s Fed speeches also gave ample evidence that the Fed is in no hurry to turn hawkish. This was also seen by the fact that at the Jackson Hole symposium, Fed Chair Janet Yellen did not speak much about monetary policy or forward guidance.

This possibly suggests that investors will be looking to the German political events. Here is a brief look at the EURUSD as the days tick by to the general elections in Europe’s largest and strongest economy.

EURUSD could settle into a range

After testing the $1.2050 handle, the common currency was seen pulling back. It would be safe to assume that the EURUSD has established resistance at this level. To the downside, support is seen at 1.1850.

Technically, in the longer term, EURUSD is likely to test the main resistance level at 1.0902 that was breached in April this year. However, this is a long way off, and the common currency could still post a rebound near 1.1720 support or at 1.1435.

EURUSD Technical Outlook: Expect sideways range with a downside break out
EURUSD Technical Outlook: Expect sideways range with a downside break out

Assuming that no fresh highs will be posted, a correction in the EURUSD could see prices falling to the 38.2% Fibonacci level at 1.1430 level. This Fibonacci level shows confluence with the support level that has formed and is pending a retest.

While the optimism in the eurozone remains high and the strong rally in the EURUSD gives reason to remain on the long side, the common currency could be facing some correction which puts at risk any weak long positions made at the current highs.

In the near term, watch the range of 1.2050 and 1.1850. A breakout from this level will potentially suggest near term direction in the common currency. Given the fact that the rally in EURUSD has not seen any decent correction, the risks are inclined to the downside.

That being said, the longer term outlook in the EURUSD remains to the upside with further gains coming in the event that EURUSD manages to convincingly break above the $1.206 handle.

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