The US dollar can continue to recover: EUR / USD Forecast. Let’s see an analysis of the last week and its possible effects in the short and medium term
An optimistic Fed, a strong NFP report, a rate hike in March, but the dollar’s gain is not yet clear in the long term.
Global economic growth drastically reduces the imbalance between central banks.
Strong US data This week they rather provided a reason to collect benefits from the recent sale of the US dollar, than to convince the speculative interest that it is time to become bullish against the dollar. The EUR / USD reached the 1.2522 level on Thursday, despite the optimistic tone of the Fed in its monetary policy statement on Wednesday.
The influence of the stability of the Dollar
The Federal Reserve said it expects inflation to “rise” this year and stabilize around its 2.0% target, consolidating expectations of a rise in March. The problem is that three rate hikes this year have already been discounted in the price and that the presidency of the central bank is changing hands. It was the last decision signed by Mrs. Janet Yellen, with Jerome Powell taking the lead from now on, which somewhat diminishes the relevance of the last announcement.
The US labor report for January It was quite encouraging, not because of the number of jobs added, nor because of the unemployment rate, but because of a good rebound in annual salaries. The world’s largest economy added 200,000 new jobs in January, exceeding expectations of 180,000, while the unemployment rate remained at 4.1%, as well as the participation rate, the latter failing in expectations. Salaries rose 0.3% monthly as expected, but rose to 2.9% year-on-year, the best reading since mid-2009, close to the Fed’s comfort level of 3%. There were a couple of minor bumps in the report, since the average weekly hours worked fell to 34.3 from the previous 34.5, but in general, it was a good report.
So, we had an optimistic Fed, a good NFP report with signs of life in wages, and the chances of a rate hike in March close to 100%. Can anyone explain why the US dollar did not recover a couple of thousand pips then?
Oh, well, the easiest answer could be to blame Trump and the political uncertainty that surrounds his government. But it is much more than that. One reason, as stated earlier, is that the market has been anticipating and valuing the decisions of central banks long before events. Another reason is that the Fed is no longer alone in the adjustment path, with global growth reasserting itself. The rate increases do not make the same difference as a couple of years ago. The market is even speculating these days that the BOJ will cut its aid programs in the short term, the ECB is in a desperate search for a reason not to cut the QE, the BOC pulled the trigger twice … is it understood ? Long-term trends depend on a big catalyst, and central banks are no longer that. The political incumbents are trying to replace them in that job, but the market is not completely convinced. The search continues.
The dollar is strongest in all areas, and perhaps, just maybe, it has reached an intermediate minimum. The currencies linked to the raw materials are the weakest this Friday, but not only because of the strength of the dollar. Regarding the EUR / USD, it remains above 1.2400, well above the highs of the last three years around 1.2100.
Technically, the pair is ending the week marginally lower, but above the 23.6% retracement of its January movement, which leaves this fall as corrective. The daily chart of the pair shows that the 20-day moving average remains firmly above the bullish 100-day and 200-day moving averages, with the convergence of the 20-day moving average with the 38.2% retracement of the movement mentioned in 1.2295. The technical indicators decreased from extreme levels of overbought, with the Momentum without direction in positive territory, and the RSI decreasing around 65, not enough to confirm a more pronounced fall.
In the weekly chart, the technical readings continue to favor the rise, since the EUR / USD is well above all its moving averages, consolidating after rising for six consecutive weeks, while the technical indicators maintain their bullish strength, positioning themselves in overbought territory. Below the 1.2400 level, weekly lows around 1.2335 are the next support, followed by the aforementioned 1.2295 level. The 1.2480 area is the immediate resistance, followed by the January high at 1.2535. Above this last, the level 1.2569, a maximum of December 2014, comes later, on the way to the 1.2600 level.
The FXStreet forecast survey indicates that sentiment towards the EUR / USD is neutral in the short term, with bearish and bullish at 39% in the weekly outlook and with an average target of 1.2433. In the long term, however, the bearish seem to be taking over the pair, increasing to 47% in the monthly view and 67% in the quarterly view. In this latter time frame, however, the average target rose from 1.1930 last week to 1.2153. Keep in mind that this is above the critical threshold of 1.2100, the dividing line for the long-term trend.
The general graph goes against the market sentiment, since it shows an upward trend in the larger timeframes under study, indicating in some way that the negative sentiment is more the result of uncertainty than the conviction of the future strength of the dollar.
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