Euro: USD/EUR (EUR=X) Downside Risks Emerge as Risk Appetite Creeps In

Euro: USD/EUR (EUR=X) Downside Risks Emerge as Risk Appetite Creeps In

Euro: USD/EUR (EUR=X) Downside Risks Emerge as Risk Appetite Creeps In

The euro benefited from a shift to risk aversion and a weaker dollar last week as the markets continued to aggressively price in a rate cut in the United States.

Fed Chair Powell, in a statement on Friday, confirmed that the policymakers will act if necessary. There was certainly an element of urgency in his unscheduled statement which was in sharp contrast to comments from several Fed members earlier in the week that attempted to downplay the potential impact of the Coronavirus.

There has been some chatter that policymakers may act as soon as this week. This should theoretically keep the dollar under pressure and provide some relief to risk assets.

Another scenario might be that Powell delivered the statement to settle the markets ahead of the scheduled March meeting in about two weeks. In either scenario, the most important consideration is whether policymakers deliver on what the markets are expecting.

The CME FedWatch tool already indicates that a larger than usual 50 basis point cut is fully priced in for the March meeting. Beyond that, the data showed a 45% chance that the interest rate will be 100 basis points lower than it currently is by June.

If the markets are getting ahead of themselves, the dollar stands to pare back losses. The Federal Reserve is not known to deliver aggressive and sudden easing and it is difficult to speculate whether the current virus outbreak warrants bold easing measures in the manner that the markets are pricing in.

Further, the euro was impacted by short-covering last week as the single currency is often borrowed to fund higher-yielding investments. The urgency for short-covering is likely to dissipate considering that Powell has strongly hinted that a rate cut is coming.

EUR/USD may pull back from current levels, especially considering that a notable technical area of resistance is in play. At the least, it seems reasonable to expect the upside momentum from last week to die down.

Bottom Line

  • Risk sentiment can potentially shift as it has become clear that monetary easing is on the horizon. This should theoretically remove the urgency in euro short-covering.
  • The risk of a dollar recovery is starting to rise as the markets are aggressively pricing in rate cuts. While the Fed Chair Powell has strongly hinted a rate cut is coming, the Fed’s sense of urgency may not be aligned with the markets.

Technical Indicators

Overall, the bias in prices is: Upwards.

The projected upper bound is: 1.13.

The projected lower bound is: 1.10.

The projected closing price is: 1.11.

Candlesticks

A white body occurred (because prices closed higher than they opened).
During the past 10 bars, there have been 8 white candles and 1 black candles for a net of 7 white candles. During the past 50 bars, there have been 25 white candles and 24 black candles for a net of 1 white candles.

Three white candles occurred in the last three days. Although these candles were not big enough to create three white soldiers, the steady upward pattern is bullish.

Momentum Indicators

Momentum is a general term used to describe the speed at which prices move over a given time period. Generally, changes in momentum tend to lead to changes in prices. This expert shows the current values of four popular momentum indicators.

Stochastic Oscillator

One method of interpreting the Stochastic Oscillator is looking for overbought areas (above 80) and oversold areas (below 20). The Stochastic Oscillator is 87.0075. This is an overbought reading. However, a signal is not generated until the Oscillator crosses below 80 The last signal was a buy 7 period(s) ago.

Relative Strength Index (RSI)

The RSI shows overbought (above 70) and oversold (below 30) areas. The current value of the RSI is 70.29. This is where it usually tops. The RSI usually forms tops and bottoms before the underlying security. A buy or sell signal is generated when the RSI moves out of an overbought/oversold area. The last signal was a buy 7 period(s) ago.

Commodity Channel Index (CCI)

The CCI shows overbought (above 100) and oversold (below -100) areas. The current value of the CCI is 180.This is an overbought reading. However, a signal isn’t generated until the indicator crosses below 100. The last signal was a buy 8 period(s) ago.

MACD

The Moving Average Convergence/Divergence indicator (MACD) gives signals when it crosses its 9 period signal line. The last signal was a buy 5 period(s) ago.

Rex Takasugi – TD Profile

FOREX EUR= closed up 0.001 at 1.114. Volume was 93% below average (consolidating) and Bollinger Bands were 94% wider than normal.

Open     High      Low     Close     Volume___
1.113 1.115 1.113 1.114 4,606
Technical Outlook 
Short Term: Overbought
Intermediate Term: Bullish
Long Term: Bullish
Moving Averages: 10-period     50-period     200-period
Close: 1.09 1.10 1.11
Volatility: 8 6 6
Volume: 82,017 65,264 72,223

Short-term traders should pay closer attention to buy/sell arrows while intermediate/long-term traders should place greater emphasis on the Bullish or Bearish trend reflected in the lower ribbon.

Summary

FOREX EUR= is currently 0.4% above its 200-period moving average and is in an upward trend. Volatility is extremely high when compared to the average volatility over the last 10 periods. There is a good possibility that volatility will decrease and prices will stabilize in the near term. Our volume indicators reflect volume flowing into and out of EUR= at a relatively equal pace (neutral). Our trend forecasting oscillators are currently bullish on EUR= and have had this outlook for the last 1 periods. Our momentum oscillator is currently indicating that EUR= is currently in an overbought condition.

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