KTM FX Weekly: EURUSD has strong support at 1.1690-1.1750; a revisit below August 2020 low looks unlikely

• Busy on Macro Front
• EUR jumps in response to the ECB meeting.
• Buying EUR on dips

EUR soars post the latest ECB meeting, and the dollar soars post-Fed Chair Jay Powell’s speech at the Kansas City Fed’s Economic Policy Forum on August 27-28. Fast-forwarding to today, the Euro kicks off the week on a positive note, but will the strength last until this week’s Fed meeting?

Euro declined further last week as traders continued to take profits after a stellar performance. 

The Euro has been stuck in sideways range over the past month. The past week it fell 0.10%, which sees it 2.0% below the August high. The dollar bounce led to the recent Euro decline. On top of it, last week’s EA economic releases, including the ECB meeting, failed to cheer the euro bulls.

However, last week’s ECB meeting suggested that the European Central Bank is not worrying about the EUR’s strength. Does it mean more steam left? Well, the EURUSD technical chart suggests the fifth wave higher could be possible. Probably this week’s Fed meeting might allow the Euro to outperform again like it did on the latest ECB day.

As expected, the ECB did not change its monetary policy. The common currency rallied nearly 0.85% to 1.1920 after Lagarde’s press release but failed to hold the gains by the end of the day.

After the ECB meeting, Philip R. Lane, Member of the Executive Board of the ECB, released the outlook for the euro area. In that post, he discusses the outlook for economic activity and inflation in the euro area, based on the new ECB staff macroeconomic projections for the euro area that were published on Sep 11.

Full press release: https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.blog200911~9864e7ae6d.en.html

Highlights: 

• The incoming data indicate a strong rebound in euro area economic activity during the third quarter.
• Domestic demand is bouncing back significantly: consumer spending increased strongly in June and July, and business investment is also recovering.
• Momentum in the services sector, which is the sector that is most sensitive to infection fears and social distancing restrictions, has slowed recently, with the services business activity PMI declining to 50.5 in August from 54.7 in July.
• Headline inflation is expected to remain negative for the rest of the year on account of the earlier collapse in oil prices and the temporary reduction in the VAT rate in Germany.

 Data review:

• The sentix economic index for Euroland rises to -8 points for the fifth time in succession. This reading is the best value since February 2020.
• In the EA, GDP down by 11.8%, according to an estimate published by Eurostat, the statistical office of the European Union. These were by far the sharpest declines observed since the time series started in 1995.
• The interest rate on the main refinancing operations remains unchanged at 0.0%. And the Governing Council will continue its purchases under the pandemic emergency purchase program (PEPP) with a total envelope of €1,350 billion. Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year.

 Data preview: Turning to the week ahead, there is plenty of action on the macro front. The highlight of the domestic week will undoubtedly be the ZEW Economic Sentiment and the EA CPI, but both the data point does not price movers. Elsewhere, E3 Central Bank meetings to focus on, starting with the Federal Reserve, followed by the bank of Japan and Bank of England. Among the Fed meeting, followed by a press conference, will be most closely watched. Earlier this month, we see the Federal Reserve move to an average inflation target approach. This move suggests the Fed’s dot plot projections could be unchanged for the years to come. We don’t expect any policy changes in this week’s Fed meeting.

 TECHNICAL OVERVIEW

The EUR has strengthened on the back of the weak dollar. We are keeping a close eye on 1.1750 on the EURUSD. A fall below 1.1750 can take the Euro down further to as much as 1.1690.

A breakdown below 1.1690 would be a sign that the trend has reversed to bearish. The 50-DMA is around 1.1720, which should be good support. Ahead of the Fed meeting, I don’t see the EURSUD going back to 1.1500 level as long as 1.1690 supports, watch out for the 5th wave higher.

 It is important to always keep in mind the risks involved in trading with leveraged instruments.

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