The Euro Selling Appetite Keeps On Going

The EUR is one of the most notable under performers as the supply just won't abate, having sold now for 6 days in a row. Ever since the big miss in the German PMI , the market has been re-calibrating swiftly its outlook towards the single currency to reflect the worsening fundamentals in Europe. The USD, on the contrary, remains a solid alternative in a market with little alternatives to diversify into.

The article is authored by Ivan Delgado, Market Insights Commentator at Global Prime. This content aims to provide an insightful look into topics of interest for traders. Feel free to follow Ivan on Twitter & Youtube. Make sure you join our discord room if you'd like to interact with Ivan and other like-minded traders. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. Also, find out why Global Prime is the highest-rated broker at Forex Peace Army.

Quick Take

There is a sense of charged uncertainty in financial markets as the Trump - Ukraine saga continues with the release of a whistle-blower complaint, alongside the news that the US is unlikely to extend waivers for US firms to supply Huawei, which further depressed sentiment as reflected by the surge in demand for US bonds as a vehicle to protect one's portfolio. It didn't matter for the interest of the USD, which stood well bid this time, in line with the bullish outlook in the index. The most noticeable movers in the last 24h include the EUR, which remains under free-fall ever since the terrible German PMI print on Sept 23 (new yearly low in EUR/USD), and the NZD, re-invigorated by the upbeat tone of RBNZ Governor Orr, who hinted at unlikely the need for ‘unconventional’ policy tools. The Sterling, like the Euro, is also under selling pressure, as the impasse to make the next political movement on the Brexit conundrum drags on. The Aussie keeps finding pockets of tepid demand at a macro support area in the index, while the CAD has put on another decent performance but is now faced with a major daily resistance in the index. The Yen has traded in a compressed manner, reflecting the state of uncertainty in US politics, while the Swissy extended its selling bias in the last European session only to find emerging bids that have so far overwhelmed sellers since the US. 

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

USD remains a buy on dips: The strong tone in the US Dollar continues to be the most evident clue to latch on with respect to currency traders not overly concerned over a potential Trump impeachment, even if the Trump - Ukraine saga continues with the release of a whistle-blower complaint.

Whistle-blower complaint takes the spotlight: The plot on the proceedings to impeach Trump thickens, after an unidentified US intelligence official claimed White House officials “were deeply disturbed”, which according to internal lawyers, “ the president abused his office for political means”. The declassified whistle blower complaint has been released and can be read here

The risk environment takes a step back: Both equities and US bond yields were unable to sustain gains as the Ukraine-related political uncertainty drags on, and to top it off, the US is unlikely to extend waivers for US firms to supply Huawei, which further dampened sentiment and led to mainly increased flows into the safety of bonds.

A very fragile Euro: The EUR is one of the most notable under performers as the supply just won't abate, having sold now for 6 days in a row. Ever since the miss of the German PMI to a horrendous 41.3 reading, way worse than expected, the market has been punishing the single currency to reflect the worsening fundamentals in Europe.  

RBNZ Gov Orr gives NZD a boost: In the last Asian session, Orr stimulated buying NZ Dollars after sounding more upbeat, but most importantly, he played down the prospects of unconventional policies. Orr said “NZ is in a sound position to both seize the opportunities and manage the challenges associated with the global low interest rate environment,'' adding “we are currently thinking hard about these questions as a precaution but our current view is that we are unlikely to need ‘unconventional’ policy tools.”

US data won't distort the Fed stance: The latest US data, while not an influence for the appreciation of the USD on Thursday, it continues to support the case that the Fed won’t be easily shaken out from its current neutral stance. The view that the US economy is a few levels above the RoW is a perception that keeps being reinforced with each piece of data as of late. The August advance trade deficit in goods came at $72.8bn from $72.5bn, beating worse estimates by a small margin. Then we saw the Q2 GDP growth at an unrevised 2.0% as another risk out of the way, only to see the core PCE deflator revised up to 1.9% from 1.7%.

Fed members cross the wires with known messages: Fed’s Vice Chairman Clarida gave a speech in San Francisco, revealing nothing new that the market hasn’t already factored in at this stage. The Fed board member said that “rising wages so far are not putting upward pressure on inflation” and that “US inflation expectations are in a range that are consistent with the Fed's mandate.” Meanwhile, Fed’s Dallas President Kaplan kept sounding more dovish, saying that “trade uncertainty is causing sluggish business investment” and that “some Texas companies are having hard time hiring skilled workers.”

Mexico cuts rates: Bank of Mexico decided to cut its rate to 7.75% from 8%, which was an expected decision although there had been calls for a more aggressive 50bp cut. There were two dissenters who opted to support a larger 50bp cut. The Central Bank noted that “balance of risks continues with a downward bias with mark uncertainty persisting.”

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.

The EUR index is technically in a very debilitated position, and at this point, we could easily be in the midst of a larger depreciation to the tune of 0.5% until the index revisits its lowest level of the year. There is no other levels of reference until then once sellers give the EUR a last push through the current level of support it has stalled at. Keeping the EUR short-side exposure looks like a sensible option given the ample downside leeway that exists at this point. Any retracement is expected to find large pockets of supply around 0.25% higher than Thursday’s close as per the horizontal line drawn in the chart. Looking to be a contrarian long EUR carries an unusual high risk with the evaporation of aggregate demand clearly visible in the index.

The GBP index has been on a steady fall for over a week now, but meritoriously, which speaks volumes of the strong buying interest shown since the breakout on Sept 13, it should still be perceived as a market that is governed by a bullish structure. That said, the close below the baseline does offer now further room (nearly 0.5%) until the origin of a demand level is tested. On the topside, the baseline overhead will be the immediate blockage. The playboo in the Sterling remains with Brexit left and center as the driver to influence flows.

The USD index has printed a daily candlestick that tends to act as a trend continuation candle after a retest of a daily area of demand got rejected with earnest. The currency looks set to expand its gains towards its most recent yearly high, effectively allowing for an additional 0.35% worth of upside before it officializes a new trend high, which looks like just a matter of time. Remember, the projected 0.35% rise is congruent with the 100% proj target, so I’d initially expect a supply imbalance in the USD to kick in on a retest of the yearly high.

The CAD index is a whisker away from breaking into fresh highs for the year, even if so far the residual supply at the daily resistance has managed to stall further appreciation. Akin to the bullish outlook in the USD, the CAD follows a similar path, even if one must be aware that there is now very little upside left, so traders looking to gain longside exposure in the CAD will be best served waiting for the index to first clear the resistance level and then look to get into long-sided business in the CAD. Alternatively, if one doesn’t justify these high levels, this is a potential supply area where shorts might be a tactic to exploit against other currencies that may be better positioned to see demand flows going through. Bottom line, patient is needed at this point to be overly committed on the CAD unless a resistance breakout eventuates.

The NZD index is not out of the woods yet as the pricing has failed to close above a level of daily resistance, which also aligns with the baseline, making it a great level of confluence to expect supply originating out of this area. This is an ideal place to regain short-side exposure in the NZD in expectations that the downtrend resumes. The aggregate tick volume on Thursday’s up candle was rather high in participation, which casts some doubt as it implies there is a rising amount of bids coming through the books to push the index through the baseline. Still, sellers are so far holding their ground in the NZD as depicted by the failure to close above the dynamic resistance + horizontal line, which is the best point of reference to understand who is in control.

The AUD index keeps consolidating at an area rich with heavy bids, as anticipated, given the macro support being tested. This is still a likely rotational level where eventually, unless fundamental news distort the flows, should seen further pushes by the Aussie heading back into a retest of the baseline, which would essentially allow an appreciation of about 0.2% from Thursday’s closing price. Not a time to be short AUD as you are trading straight into a major support area where heavy bids keep limiting the downside in the index. Looking to match up longs AUD vs a weaker currency such as the EUR or one facing supply like the CAD, even if the latter riskier, makes sense in order to exploit the upcoming flows in Europe/US.

The JPY index continues to exert pressure into a daily resistance area, even if for now not enough demand has come through the books to validate a breakout. This has led to a period of stagnant price action with a narrower range to take as reference. On the downside, the baseline and a horizontal support in red (tested and rejected once) should cover any downside eventualities in case that risk appetite makes a comeback in the next 24h. A break through resistance would allow the Yen to open the doors for an extra 0.35-0.4% of potential gains.

The CHF index has traveled fast from an origin of supply as per the red area all the way down to revisit a horizontal level of support, all happening in a matter of 36h. Those looking for long-side CHF exposure off the daily support, including myself, have so far been rewarded with a trade that by now you hopefully have managed to break to break even given the vigorous bounce. The overall structure of the market is still bullish after the double bottom printed, alongside the price above the baseline, which makes the outlook more bullish than bearish, even if the price is now trading in no man’s land with no immediate levels of buy side action until a retest of the mentioned levels that have acted as reactionary events for price.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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