EUR/USD needs to close above 1.1284, US-German yield spread largely unchanged after Draghi speech

Don’t be in a hurry to bet on a big move higher in the EUR/USD pair. The major is yet to chew through critical resistance around 1.1284. Take a look at the weekly chart – it shows multiple failures around 1.1284 – which is 161.8% Fib extension level.

Draghi says reflation forces are at play…

At the ECB Forum on Central Banking in Sintra, President Draghi said –

  • “Monetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation”
  • “The threat of deflation is gone and reflationary forces are at play”
  • “With reflationary dynamics slowly taking hold, we now need to ensure that overall financing conditions continue to support that reflationary process, until they are more durable and self-sustaining”

EUR bulls are certainly cheering Draghi’s comments. EUR/USD rallied from 1.1190 to 1.1280 and is up full one figure compared to the daily low of 1.1172. Draghi’s ‘reflation’ comment is certainly encouraging and is enough to boost speculation that the QE taper could happen sooner than expected.

However, US-German yield spread is largely unchanged

US-German 2-year yield spread is largely stagnant around 195 basis points. The 10-year yield spread has narrowed only slightly to 186 basis points from 183 basis points. The lackluster reaction in the yield spread means the bond traders are either not buying Draghi’s comments or they are expecting Yellen (speech due later today) to boost the hike expectations.

So it is advisable to wait for at least a technical breakout – a convincing move above 1.1284 levels before joining the EUR party. Expect a sharp pull back if Yellen talks hawkish…

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FX Trading Notes – 22/6/2017

Key points

  • European equities are under pressure, while US stocks have opened on a flat note. The US dollar is flat lined as falling inflation expectations dampen the Fed rate hike outlook.
  • 5-30 yield curve has been completely hammered. Expect weakness in banks, especially if the oil finds fresh sellers.

S&P 500 – Tuesday’s bearish Marubozu candle and Wed’s bearish move suggests exhaustion. I wouldn’t mind attempting short trades with very small tight stops. Objective would be 2148-2405.

EUR/USD – A nice rounding top kind of formation on the 4-hour chart. The 50-MA & 100-MA have topped out on the 4-hour chart. Makes sense to stay short, expecting a retreat to 1.1119-1.11 handle. A break lower should yield 1.1043 (daily 50-MA).

GBP/AUD – Descending trend line on the 4-hour breached, bullish price-RSI div. Attempt longs on a break above 1.6804 with tight stops. Expecting the cross to jump to 1.6865-1.6938.

Brent Oil – Having noted the oversold RSI on the daily and 4-hour time frame, am watching for a potential bullish-price RSI div on 4-hour followed by a upside break from the falling channel on the 4-hour. That could yield at least 100-150 point up move. Would want to initiate fresh shorts around $47-47.50 if the rise to the said levels lacks the backing of a bullish RSI div.

 

UK CBI: Highest reading since 1998, Manufacturing demand strengthens

Manufacturing firms reported that both their total and export order books had strengthened to multi-decade highs in June, according to the CBI’s latest Industrial Trends Survey.

Key takeaways

Export orders also improved to a 22-year high

Output growth eased to the levels seen at the start of the year

Pricing pressures remain strong, with manufacturers continuing to expect a sharp rise in average selling prices

Average selling prices are still expected to rise in line with the level seen in May (+23%), having eased from their peak in February (+32%)

FX Trading Notes – 20/6/2017

Broader market theme – USD under pressure on Evan’s dovish comments, Carney pile drives GBP. 10-yr yield still below 200-DMA, needs to break higher to yield further gains in USD/JPY

EUR/USD – Currently trades in no man’s land. Selling to gather pace below 1.1130 lvl. Such a move would push RSI below 50.00 (bearish), in which case 50-day ma (1.1022) could be put to test. Bull market revival likely abv 1.1208. Expecting a downside break soon. Ready to offer Eur below 1.1130, anticipating a drop to 1.0980.

GBP/USD – Carney torpedoed GBP. Falling tops established. RSI below 50.00, thus supp at 1.2635 could be tested. Sell on rallies … bearish invalidation abv 1.2750.

USD/JPY – Upside break from falling channel on the daily revives the bull market. Bearish macd div. on 4-hr chart could yield pull back to 111.00, where fresh demand is likely. Only a daily close below 110.64 would signal bullish invalidation.

EUR/GBP – Initiate fresh longs around 0.88 as the bulls have successfully defended the rising trend line. Re-test of 0.8866 looks likely. Offers seen coming in below 0.8719 levels.