7th December - Dollar Euro remains a long term buy
07 December 2015
TECHNICALS
WEEKLY CHART
The Continuation Flag remains in place, despite the sharp rally.
DAILY CHART
The detail shows the brutal rally – through the first resistance at 1.0818.
But we don’t expect any convincing follow-through.
The big picture remains bearish.
FUNDAMENTALS:
Has the recent Bull run in Dollar/Euro has come to an end?
Traders had, until Thursday last, bought the Dollar against the Euro for two reasonably straight-forward reasons:
So what has changed?
At yesterday’s ECB policy meeting the ECB announced an extension to their existing QE program, announcing an extension from the original September 2016 end date to March 2017. This amounts to a considerable further easing of policy and the ECB made it known some months ago that it was planning this step. But over recent weeks the rhetoric coming out of the ECB had been leading markets to expect something extra. Possibly something considerably extra and it was that disappointment that led traders to square up their short Euro positions.
However ,all is not lost for the Short term Dollar bulls. The monthly non-farm payroll report was due out Friday. Sentiment was set such that a strong number would mean the FOMC would surely deliver the December rate hike, even though the two ISM surveys released earlier in the week were weaker than expected.
Add in comments made by Janet Yellen a day or so earlier and the stage seemed set for a hike..
In the event the non-farm payroll report was stronger than expected, but the Dollar sold off against the Euro, does this mean the bull run in the Dollar is over?
We don’t think so.
The Euro zone recovery has, through last week’s PMI surveys, shown signs of picking up. But the ECB still forecasts weak inflation, and the Euro zone economy is still smaller than it was even in the early years of the financial crisis.
So why has the Euro suddenly found strength?
We think the current move is the result of Dollar longs being squeezed out after the ECB announcement on Thursday fell short of expectations. From a fundamental perspective the monetary policy in the US and Euro zone is set to diverge.
The reason it seems the ECB’s ease fell short of market expectations, fuelled by earlier ECB rhetoric is due to German opposition.
The result is likely to be the ECB will have to consider taking further action in the not-too- distant future.
So although the Dollar looks under pressure today, we judge a new Dollar buying opportunity will soon present. Traders will re-focus back to economic fundamentals where US growth in Q3 was a respectable 2.1%; better than anything in the Euro zone.
Moreover, once the size of the first Fed rate hike is revealed traders will be better able to calibrate the Fed’s likely future moves which will lead US monetary policy back to a more neutral level of about 2 ½%.
So although the Dollar bulls have been put on the back foot, the bears may soon be in retreat again.
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The Ftse is ripe for a big move