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15 May 2013
Forex: EUR/USD finally closes below 1.2950, further declines to come?
FXstreet.com (Barcelona) -The EUR/USD finally closed below the bottom end of the recent trading range, finishing down 50 pips at 1.2931. Economic data out of Europe was focused on the German Zew, which missed expectations coming in at 36.4 vs. 38.3 estimates. It will be another very busy day of data with both European GDP and German GDP being released in the upcoming European session. Furthermore, we will see PPI, Industrial Production, Capacity Utilization out of the US.
According to Kathy Lien of BK Asset Management, “The EUR/USD finally broke below 1.2950 and to our disappointment the sell-off did not gain momentum quickly. Instead, the currency quietly dripped lower to end the day at its lows. Economic data continues to be weak with the German ZEW survey holding steady at 36.4. Economists expected the ECB rate cut and the rise in equities to boost investor confidence but it failed to do the trick as investors grew more concerned about current conditions. To their credit, they were more optimistic about future conditions but clearly that was not enough to prevent further losses in the euro. The same was true of Eurozone industrial production, which rose 1% in the month of March."
She went on to add, “Eurozone GDP numbers are scheduled for release tomorrow and while the German economy is expected to return to growth, the Eurozone as a whole should have remained in recession in the first quarter. If GDP growth for region is negative, it would mark the sixth consecutive quarter of contraction. Considering that we are also looking for stronger German growth in the first 3 months of the year because retail sales and trade activity improved, there's room an upside surprise in the regional index. If GDP growth surprises to the upside, the EUR/USD could hold 1.29 but if it disappoints like the ZEW survey, the currency pair could slip down to support at 1.28.”
The recent correlation breakdown between asset classes has also caught some analyst's attention. The previous days of seeing weakness in fx pairs such as the Euro and Aussie which use to give the market a “risk off” mentality seem to have changed dramatically in recent weeks. If the Euro starts to de-correlate with stocks, it’s hard to imagine the pair holding a firm bid should US data continue to improve.
According to analysts at NAB Global Markets, “In contrast to market moves either side of the weekend whereby rising bond yields supported the US dollar but had a restraining impact on US equities, overnight price action sees Treasury yield and equities both smartly higher (S&P500 +1%). With that has come a further push higher in the US dollar that has seen the narrow DXY version of the dollar index push cleanly though its previous 2013 high to sit at 83.59 at time of writing (up 0.4% on the night).”
From a technical perspective, it’s important to point out that although the pair did close below the bottom end of the trading range, the pair is still in a very weak trending market. Short term moving averages on the daily chart are now in bearish set up, while RSI (14) remains in neutral. If we apply the ADX (7) indicator to the daily/weekly charts, we can see the slope of the indicator is sharply downward while the value is extremely low sitting just above 18 on both charts (most would consider value above 20 or 25 a strong trending market, but more importantly the slope of the ADX must be upward).
Furthermore, connecting the lows on the weekly chart we can see there is a major support trend line at 1.2860, followed by a head & shoulders neckline support at 1.2770 (this will also be a very important level to keep an eye on). If the pair would close the week below 1.2770, it would confirm the head and shoulders pattern on the weekly chart which has measured move targets all the way down near 1.1870.
According to Kathy Lien of BK Asset Management, “The EUR/USD finally broke below 1.2950 and to our disappointment the sell-off did not gain momentum quickly. Instead, the currency quietly dripped lower to end the day at its lows. Economic data continues to be weak with the German ZEW survey holding steady at 36.4. Economists expected the ECB rate cut and the rise in equities to boost investor confidence but it failed to do the trick as investors grew more concerned about current conditions. To their credit, they were more optimistic about future conditions but clearly that was not enough to prevent further losses in the euro. The same was true of Eurozone industrial production, which rose 1% in the month of March."
She went on to add, “Eurozone GDP numbers are scheduled for release tomorrow and while the German economy is expected to return to growth, the Eurozone as a whole should have remained in recession in the first quarter. If GDP growth for region is negative, it would mark the sixth consecutive quarter of contraction. Considering that we are also looking for stronger German growth in the first 3 months of the year because retail sales and trade activity improved, there's room an upside surprise in the regional index. If GDP growth surprises to the upside, the EUR/USD could hold 1.29 but if it disappoints like the ZEW survey, the currency pair could slip down to support at 1.28.”
The recent correlation breakdown between asset classes has also caught some analyst's attention. The previous days of seeing weakness in fx pairs such as the Euro and Aussie which use to give the market a “risk off” mentality seem to have changed dramatically in recent weeks. If the Euro starts to de-correlate with stocks, it’s hard to imagine the pair holding a firm bid should US data continue to improve.
According to analysts at NAB Global Markets, “In contrast to market moves either side of the weekend whereby rising bond yields supported the US dollar but had a restraining impact on US equities, overnight price action sees Treasury yield and equities both smartly higher (S&P500 +1%). With that has come a further push higher in the US dollar that has seen the narrow DXY version of the dollar index push cleanly though its previous 2013 high to sit at 83.59 at time of writing (up 0.4% on the night).”
From a technical perspective, it’s important to point out that although the pair did close below the bottom end of the trading range, the pair is still in a very weak trending market. Short term moving averages on the daily chart are now in bearish set up, while RSI (14) remains in neutral. If we apply the ADX (7) indicator to the daily/weekly charts, we can see the slope of the indicator is sharply downward while the value is extremely low sitting just above 18 on both charts (most would consider value above 20 or 25 a strong trending market, but more importantly the slope of the ADX must be upward).
Furthermore, connecting the lows on the weekly chart we can see there is a major support trend line at 1.2860, followed by a head & shoulders neckline support at 1.2770 (this will also be a very important level to keep an eye on). If the pair would close the week below 1.2770, it would confirm the head and shoulders pattern on the weekly chart which has measured move targets all the way down near 1.1870.