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Euro Trades Defensively with FOMC Waiting in the Wings

David Becker
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www.iforex.com
Euro Trades Defensively with FOMC Waiting in the Wings

The EURUSD is trading at the bottom end of a small range after testing resistance near the 10-day moving average at 1.2970. The euro, along with the yen, had been a funding currency for carry positioning. However, euro sentiment remains broadly bearish. The 10-year Bund versus T-note yield differential has slipped back below -153 basis points Monday today, wider by over 3 basis points from Friday levels, and is re-approaching the cycle lows seen early last week.

This week’s FOMC might see the Fed ratchet up the hawkish language by a degree or two. The EU, meanwhile, implemented on Friday fresh sanctions on Russia, which is the region’s fourth biggest trading partner and which should help maintain the ECB’s dovish bias at a time when the Fed is heading for a tightening. The key issue around the FOMC meeting is a possible change in forward guidance now that QE is drawing to a close.

The Eurozone trade surplus unexpectedly narrowed to 21.2 billion in July from 16.7 billion in June as exports dropped 0.2% month over month, while imports rose 0.9% month over month. This was the second consecutive months of contracting nominal export growth, which is worrying especially considering that German exports actually rebounded in July, which suggests the rest of the Eurozone continues to fall further behind amid dwindling competitiveness especially in countries such as France and Italy. The weaker EUR should go some way to address that but can ultimately only temporarily mask underlying structural weaknesses. The intensifying tensions with Russia are also hanging like a dark cloud over the export outlook.

The currency pair has formed a bear flag pattern, which is a continuation pattern, which could eventual test target support near 1.27. Momentum has flattened, as the MACD (moving average convergence divergence) index nearly printing near the zero index level. The RSI is still oversold printing a reading of 27, which is below the oversold trigger level of 30.

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