FX Traders’ weekly EURUSD fundamental picture, market drivers, short and medium term-direction of the EURUSD trend
The following is a partial summary of the conclusions from the fxempire.com  fxempire.com ’ meeting in which we cover outlooks for the major pairs for the coming week and beyond.
Summary
- Technical Outlook: As noted in Part 1, near term tight trading range with more upside potential if fundamentals provide the excuse. Longer term bearish wedge, fundamentals suggest more downside.
- Fundamental Outlook: Likely Medium Term Trading Range And What’s Needed For A Breakout
- Bullish & Bearish Fundamentals For Short, Medium Term
- Key Economic Calendar Events, Earnings This Week
- Trader Positioning From Real Time Retail Trader Sample
- Conclusions: Some potentially potent drivers, but the big moves likely not until the following weeks & Why
FUNDAMENTAL OUTLOOK: THE BALANCE OF BULLISH VS. BEARISH
Here’s a summary of the medium term fundamental outlook for the pair, followed by details and the shorter term fundamental drivers for this week.
The EURUSD’s Likely Medium Term Trading Range And What’s Needed For A Breakout
The current set of fundamentals before us continues to suggest that the EURUSD remains in its 11 week trading range of 1.36 -1.40. Why should it?
ECB, Fed Policy Unlikely To Change Any Time Soon: Despite the ECB’s latest attempts to jawbone the EUR down below the 1.39 -1.40 area with threats of further easing, the EURUSD has held steady. Meanwhile the Fed has given no indication of coming policy changes, and markets have not responded to the past week’s ECB attempts to jawbone the EUR lower.
Not surprisingly, the gap between benchmark interest rates for both the EUR and USD has not widened.
What could break the pair out of this range?
- Markets see the long anticipated sustained rate advantage for the USD. Similarly, expect the EURUSD to move with any trend in USD benchmark rates. For example, the EURUSD’s drop (and USD rally) on Thursday followed rallies in 2, 5, and 10 year Treasury yields.
- ECB and Fed policy begins their long anticipated divergence
- –the ECB moving to more easing that would undermine the EUR)
- –the Fed (faster than anticipated tightening that would boost the USD)
- A major change in overall risk appetite. The effects on the pair could vary depending on what drives the change. For example:
- –If risk appetite grows due to much stronger US data that also raises market expectations for a faster tightening and rise in US rates, then the pair will drop as the USD gains strength relative to the EUR.
- –If however, the driver of higher risk appetite does not raise expectations for a faster USD rate hike, the EUR’s higher ranking on the risk spectrum suggests that it would then gain on the USD and send the pair higher. The upside breakout for the pair could be sharp if that driver raises hopes for the EU’s recovery, for example, and widespread and sustained improvement in EU economic data.
- –Similarly, if a big risk-aversion driver originates from US data and thus dials back US rate hike expectations, the pair would rise on relative USD weakness. If it originates from the EU and raises expectations for more extensive easing, then we’d see the EURUSD break hard to the downside.
Until at least one of the above occur, the EURUSD is likely to remain in the 1.36 -1.40 range.
Bullish (Good For The EUR Or Risk Appetite, Bad For The USD)
Economic Data, Earnings: Not Too Bullish To Feed Fed Rate Hike Fears
US data and earnings were overall better than for Europe. That was good enough to feed general risk appetite, with virtually all of our sample stock indexes closing higher on the week (assisted by last week’s close near strong support that just begged for a bounce on any excuse).
US retail data was solidly better than expectations. Steadily rising consumer spending is a key to sustained US growth, and we discussed why in some depth last week here.
However US data and earnings weren’t good enough to raise expectations for faster Fed tightening.
