Sunday, August 31, 2014

Euro-dollar is under considerable pressure | …but we do not chase the market

NB: Today is the Labor Day holiday in the USA and Canada, and Forex traders Stateside will not be at their desks. Trading can be expected to be thinner than normal during the North American session as a result

The Eurozone seems to be experiencing something of a perfect storm at the moment, with weak GDP growth and high unemployment adding to the woes brought about by low to negative inflation figures. Just this morning the stats for second quarter GDP in Germany came in and showed that growth in that period, for the country that is the locomotive economy for the whole Eurozone, was negative, at -0.2%. The average for all the countries in the Euro area, for the full year, is a paltry 0.8%.

Over in the US, on the other hand, GDP seems to be surging ahead, coming in at 4.2% annualized last Thursday (August 28th).

All of this has resulted in something of a meltdown for the EURUSD, which began on 18th – 19th August, after a frustrating sideways range-bound movement for the first half of the month.

…but we do not chase the market

We would like to be part of this move down. However, we do not chase the market. We will await a pullback, of which there is every possibility this week. The reason for this is that, on Thursday (Sept 4th), the ECB has its monetary policy statement.

The Forex market is expecting something concrete, possibly even the announcement of a form of Quantitative Easing (QE) to alleviate the economic distress outlined above. However, Mario Draghi and his colleagues are not to be rushed either, and they are likely to claim that the previous measure taken to ignite inflation, the decision to allow overnight deposit rates to turn negative, needs time to work. And EONIA, the measure of these overnight rates, only turned negative in fact late last week for the first time.

Add to that the contention by several Forex brokers that short positioning in the EURUSD is at its highest level in over two years and we have the potential for any disappointment in the ECB announcement to ignite a short squeeze that will put EURUSD into a countertrend move that could provide an entry position for what is likely to be an overall dominant trend in the downward direction – provided of course that this analysis still pertains at the time when we instruct the Mandelbrot routine to make its move.

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