During the last month, the bearish trend in EURUSD regained its momentum – the main pair has lost 8% for the last four weeks. In particular, the first week of November, when the confidence of traders that the Fed will raise the rate already December this year reached 70%, destroyed all ground of the Euro currency after the 350 pips (3.3%) depreciation, reaching the level of April 23. However, the last week granted some respite for the euro. Let us take a closer look to events in the economies of the US and the Eurozone to explain the factors that provided support.
On Thursday, the weekly data on the US unemployment claims was announced slightly less than expected – 276,000, which is the same level as a week ago, instead of the forecasted 270,000. The dollar index fell by 0.7%, which is almost insignificant comparing to the 6% increase during the last five weeks. The reason is that this value still fits well in the downward trend of the unemployment, remaining below 300K since March. Moreover, October has been a very successful month for the US labour market, exceeding market’s expectations about shrink of unemployment. Since the true value of the unemployment claims is between 259K and 280K according to a Bloomberg survey, there are no fears about the improving situation.
Market players have already started their game of expectations before December’s Fed decision, which cannot be called too early recalling the multiple failing Fed’s own of promises during this year. Progress on the labour market is the main aspect the Ms Yellen claims will be taken into account to decide whether to raise the rate the first time in nine years.
On Friday, preliminary GDP of the third quarter of the European countries was released. Overall, GDP growth in summer was by 0.1% lower than in the second quarter of 2015 – the economy of the Eurozone economy grew by 0.3% instead of the expected 0.4%. One of the reasons for it was the long upwards correction of the euro, unexpected for the summer months, which did not lead to the increase in competitiveness of the European production. The inflation and the increment of loans keep struggling to start an upward trend, which increases risks of further easing of the monetary policy. Despite the largest economies showing their growth stable at 0.3% QoQ in Germany and France, the south remains the source of problems for the Euro Area, with Italy and Spain underscoring the estimations.
Additionally, this data means that the growth of the EU economy will most probably drop behind the estimated 1.7 percent in 2015, forecasted last winter by the European Commission. Furthermore, the market now has all arguments to predict the downward revision of the 2016 proposed growth from 2.1%, part of which was included in prices on Friday. The undistinguished reaction to the weak US retail sales data proves the fact that Friday evening the market was readjusting its expectations.
Keeping all that in mind, we can conclude that there are significant fundamental factors that lead to the widening of the gap in recovery of the US and EU economies. Therefore, further depreciation of the euro against the dollar is expected. The Euro Index I.EURX is going down within the limits of the envelope seen on the graph, which has proven five times. Its upper boundary is a very strong short-run median, which means that bulls in the euro have no chances until the dashed line (mirrored envelope) fails its resistance. This makes short positions in EURUSD appealing at least until it remains above 1.053, until the Dollar Index I.USDX reaches its psychological resistance at the 100.00 level.