27th October - This looks like the Dollar breakout
30 October 2017
TECHNICALS:
MONTHLY CHART
The multiple Top in the Euro completed some time ago at the beginning of 10265.
The market has moved sideways since then, save for a fast retracement back up to test the successive horizontal resistances around 1.20.
Because the resistance was rather diffuse, there was significant penetration up to the 1,20.
But the last two months have seen a fall – has the market turned against the Euro as we expect?
DAILY CHART
This short-term chart is very encouraging for the Euro bears.
There are two nested bear H&S reversal patterns : one completed, one on the point of completion.
The minimum target for H&S1 of 1.16 is almost achieved.
But the minimum target for H&S2 is very much lower around 1.125.
The Euro bears and Dollar bulls are in charge.
FUNDAMENTALS:
The Dollar has been on a weakening trend against the Euro since early January as traders discounted the likelihood of Trump’s campaign promises ever being implemented.
As a steady stream of government officials left Trump’s White House and the Russia scandal grew, the Dollar fell out of favour as traders turned their attention to the Euro zone and the strengthening economic recovery taking root there.
But sentiment has shifted again. The US Federal Reserve has finally announced the start of its own balance sheet reduction and surprised observers by announcing that it would continue hiking rates, contradicting its own earlier and much-repeated policy guidance of leaving rates alone. At first, as policy makers began to unwind their massive emergency bond holdings, the policy shift offered the Dollar little or no support.
Yet, in recent weeks Trump has resurrected his tax cutting pledge and in recent days won a crucial vote in the Senate making that promise look likely to become government policy.
This halted the Dollar’s decline. A rally still looked unlikely and a period of range trading was beginning to look the most likely outcome.
That was before the ECB stepped in. Having deliberated at some length what to do with their own QE program, ECB President Draghi announced at this week’s press conference that the QE program would extend to September 2018, but with a taper.
The ECB’s new Bond buying commitment would be reduced to E30 Bn a month and although this represents a large reduction, it is considered dovish due to the program’s significant extension.
The impact of these three developments on the Dollar has resulted in a sharp turn around against the Euro and other major currencies.
Trump’s plan is to not only cut tax, but also spend big on renewing infrastructure and expanding US military capability, these policies will not only fuel growth, which is currently running at a more than respectable annualised 3.0%, but in the medium term at least, would expand the US budget deficit.
In such an environment the Fed would hardly sit idly by, and would likely adopt a more aggressive policy stance. The Fed is already concerned that a reasonably tight labour market will ultimately lead to higher inflation. If Trump succeeds in getting his tax cut into law and his other spending policies through, faster economic growth would require yet more labour and in an already tight labour market salaries/wages would surely begin to rise placing upward pressure on inflation.
We think the Dollar has experienced a turning point. We expect the Dollar to rally significantly from here against the Euro.
Note in addition that the ECB has publicly stated on several occasions that that it doesn’t want to see strengthen much further from here, if at all.
It seems the discarded Trump trade is back!
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3rd November - Why the rate hike weakens the Pound 
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19th October - Can Sterling Euro hit par