Tuesday, April 21, 2015

Euro-dollar is seeking direction | Eurozone QE and Greece are predominant drivers

Right now the Single Currency (EURUSD) is almost totally driven by events in Europe, as opposed to those that are taking place in the US. Stateside, they have decided upon the raising of core interest rates, but are not in any hurry to do so. The Federal Reserve is blowing in the wind of inflation expectations, and there is reason to believe that they may continue do so for some time. Whatever pullback there is in US dollar sentiment (a fall is USD causes EURUSD to rise), is due to the off-again nature of those core interest rate expectations. At the same time yields on treasuries continue quietly to rise, which is a positive for the value of the US dollar.

Eurozone QE and Greece are predominant drivers

In the Eurozone, however, fundamental analysis must centre on two things, one more definite than the other. Due to recent remarks from Mario Draghi and various other members of the ECB, the continuation of Quantitative Easing in the Eurozone is as certain as anything can be in Forex. The great unknown is how the Greek situation will play out. The next Eurogroup meeting that will discuss this is this coming Friday, April 24th. In the meantime we are bedevilled with rumours of such as frantic Greek efforts to raise cash from anywhere, even its municipalities, to pay its government debts, and a tightening of the screws from the ECB in the form of more restrictive emergency funding for Greek banks. Well respected economists, including Paul Krugman, continue to worry about an accidental Greek exit from the Euro, which neither party wants but which could come about as a result of all the positioning and brinkmanship that is going on. The irony is that, given the nature of Forex, such a development could now, conceivably, actually be a positive for the Euro (although there would be much volatility before such an eventuality would be made manifest).

In the meantime the EURUSD pair looked like it had entered into a distinct down channel on the hourly chart (see above). This started at the commencement of this week’s trading, on Sunday night in the Asian session. The exchange rate required all of Monday and the beginning of yesterday to break through support at the 200 period EMA but, having gone through it, then looked to be using that as resistance, in the time-honoured manner.

The fall had been put down to “safe-haven” buying of the US dollar, in a week that is short on fundamental news. Like nature, the Forex market abhors a vacuum, so the Greek situation was made to fill muster. However, late in the London session yesterday, some strong buyers of the Euro confounded all of this by sending the pair above both the 200 period EMA and the top of the hourly down-channel just described. The rise was no doubt aided by short-sellers who were forced to cover their positions when the twin resistances were breached, the so-called short squeeze effect.

Never a dull moment.

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