The EUR/USD started last week on a quiet note, with rates consolidating in a tight 75-pip range for the first three days of the week. The placid trading conditions were abruptly interrupted yesterday though, when the pair exploded to the topside. The move was driven by at least 4 different factors, some more significant and sustainable than others:
1) Better-than-Expected PMI reports
The first and most significant reason for the euro's rise yesterday was the better-than-expected PMI reports out of the currency area. The Manufacturing and Services PMI reports for the largest economies were almost unanimously stronger than traders anticipated, with a slight miss in the German Services PMI being the only exception. For the Eurozone as a whole, Services PMI came in at 51.9 vs. expectations of 51.5, and Manufacturing PMI printed at 53.9 vs. 53.2 expected, both among the highest readings since mid-2011.
These beats were even more surprising given ECB President Draghi's dovish commentary at his most recent ECB press conference. In that presentation, Draghi explicitly highlighted "downside risks stemming from weaker than expected economic activity." Draghi's downbeat comments set a low hurdle for future economic data, and Thursday's PMI report cleared it with ease. If stronger fundamental data like this becomes a trend, the EUR/USD could continue to strengthen in the coming days and weeks.
2) Swiss National Bank's Macroprudential Measures
Astute traders will note that yesterday's rally actually kicked off at 7:00 GMT, prior to the PMI releases as 8:00GMT. The initial spark for the surge was the Swiss National Bank's decision to increase the amount of capital banks have to hold against mortgage write-downs. In layman's terms, the SNB is becoming concerned with a potential housing bubble, and is taking steps to slow down the house price rise. This "stealth tightening" of monetary policy drove the Swiss Franc predictably higher, and given the tight correlation between the EUR and CHF, the single currency rose in unison.
3) Weak U.S. Data
There was a dearth of economic data out of the U.S. last week, but the few reports we did get were somewhat discouraging. The Markit Manufacturing PMI report missed expectations and though the existing home sales data beat expectations, a big negative revision overwhelmed the modest improvement on the headline figure.
Some traders and analysts have suggested that these weak economic reports may prompt the Federal Reserve to reconsider tapering its Quantitative Easing program this week, though we doubt these relatively minor data points will sway the Fed's resolve. The constant (over)analysis of U.S. economic releases and their effect on the Fed's taper timeline has led to volatility in the greenback over the last few weeks, and this will likely be a recurring theme for all of 2014.
4) Bullish Breakout from Falling Wedge
These three fundamental storylines led to a big technical breakout above a 4-week falling wedge pattern (below). A falling wedge is actually a bullish pattern because it shows declining selling pressure on each subsequent swing lower. Once the EUR/USD broke above the top trend line, technical buyers jumped in to the EUR/USD, accelerating the rally in progress and taking the pair up to 1.3700.
Where Will EUR/USD Head Next?
Of course, the most interesting question for traders is "Where will the EUR/USD head next?" While it's impossible to know with certainty, there are a number of bullish technical signals as we head into a new week.
First, the MACD is crossing back above its signal line for the first time since mid-December. The shift to bullish momentum could serve to drive the pair higher this week. In addition, candlestick connoisseurs will note that the Thursday's price action created a large Bullish Marubozu Candle*, which frequently signals a continuation in the same direction.
Resistance levels to watch this week:
◾ 1.3700 - round handle resistance
◾ 1.3745 - 61.8% Fibonacci retracement
◾ 1.3810 - 78.6% Fibonacci retracement
◾ 1.3890 - previous resistance, 2-year high
Support levels to watch this week:
◾ 1.3630 (20-day exponential moving average)
◾ 1.3600 (round handle support)
◾ 1.3525 (61.8% Fibonacci retracement)
* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction
1) Better-than-Expected PMI reports
The first and most significant reason for the euro's rise yesterday was the better-than-expected PMI reports out of the currency area. The Manufacturing and Services PMI reports for the largest economies were almost unanimously stronger than traders anticipated, with a slight miss in the German Services PMI being the only exception. For the Eurozone as a whole, Services PMI came in at 51.9 vs. expectations of 51.5, and Manufacturing PMI printed at 53.9 vs. 53.2 expected, both among the highest readings since mid-2011.
These beats were even more surprising given ECB President Draghi's dovish commentary at his most recent ECB press conference. In that presentation, Draghi explicitly highlighted "downside risks stemming from weaker than expected economic activity." Draghi's downbeat comments set a low hurdle for future economic data, and Thursday's PMI report cleared it with ease. If stronger fundamental data like this becomes a trend, the EUR/USD could continue to strengthen in the coming days and weeks.
2) Swiss National Bank's Macroprudential Measures
Astute traders will note that yesterday's rally actually kicked off at 7:00 GMT, prior to the PMI releases as 8:00GMT. The initial spark for the surge was the Swiss National Bank's decision to increase the amount of capital banks have to hold against mortgage write-downs. In layman's terms, the SNB is becoming concerned with a potential housing bubble, and is taking steps to slow down the house price rise. This "stealth tightening" of monetary policy drove the Swiss Franc predictably higher, and given the tight correlation between the EUR and CHF, the single currency rose in unison.
3) Weak U.S. Data
There was a dearth of economic data out of the U.S. last week, but the few reports we did get were somewhat discouraging. The Markit Manufacturing PMI report missed expectations and though the existing home sales data beat expectations, a big negative revision overwhelmed the modest improvement on the headline figure.
Some traders and analysts have suggested that these weak economic reports may prompt the Federal Reserve to reconsider tapering its Quantitative Easing program this week, though we doubt these relatively minor data points will sway the Fed's resolve. The constant (over)analysis of U.S. economic releases and their effect on the Fed's taper timeline has led to volatility in the greenback over the last few weeks, and this will likely be a recurring theme for all of 2014.
4) Bullish Breakout from Falling Wedge
These three fundamental storylines led to a big technical breakout above a 4-week falling wedge pattern (below). A falling wedge is actually a bullish pattern because it shows declining selling pressure on each subsequent swing lower. Once the EUR/USD broke above the top trend line, technical buyers jumped in to the EUR/USD, accelerating the rally in progress and taking the pair up to 1.3700.
Where Will EUR/USD Head Next?
Of course, the most interesting question for traders is "Where will the EUR/USD head next?" While it's impossible to know with certainty, there are a number of bullish technical signals as we head into a new week.
First, the MACD is crossing back above its signal line for the first time since mid-December. The shift to bullish momentum could serve to drive the pair higher this week. In addition, candlestick connoisseurs will note that the Thursday's price action created a large Bullish Marubozu Candle*, which frequently signals a continuation in the same direction.
Resistance levels to watch this week:
◾ 1.3700 - round handle resistance
◾ 1.3745 - 61.8% Fibonacci retracement
◾ 1.3810 - 78.6% Fibonacci retracement
◾ 1.3890 - previous resistance, 2-year high
Support levels to watch this week:
◾ 1.3630 (20-day exponential moving average)
◾ 1.3600 (round handle support)
◾ 1.3525 (61.8% Fibonacci retracement)
* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction
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