Good morning traders. Hope you all had a good weekend.
As we start the new quarter its worth a quick look at where we are re the macro environment and its relevance to the euro and more specifically from our pov to the eurusd.
The Macro View
First up is the eurozone economy itself. During the last few months the overriding issue has been the apparent general slow down in growth (or increase in growth concerns to be more precise). We have had a series of poor data prints from PMIs to CPI data particularly out of Germany which have skewed the view on risk to the downside across the EU.
Consequently we have had Draghi and the ECB on the wires and via policy extolling a cautious tone and pushing any guidance on possible rate hikes out into next year from their earlier stance at the end of this summer. We also had Italy in a technical recession and political worries in France via the gilet jaunes.
But more recently we have seen German Ifo confidence print better than expected, German unemployment at its best level for years and Italian yields holding up well. I can´t really comment on where we are at re France and the recent protests but it does seem eurozone economic concerns could be basing. Perhaps Spring is in the air not just seasonally but for the eurozone as well?
Next up we can’t forget Brexit – we will never forget Brexit :). How this is finally resolved may now be further away that ever if a long extension is the result of this latest round of political machinations. It has certainly created a cloud over the the EU economy.
While there is still a chance of a no deal outcome which would be highly negative for the euro, my guess is a long extension or the slim possibility of May’s deal being accepted. On the other hand we could be moving to a general election and a Labour government. How this will play out on the euro is anyone’s guess.
This quarter should at least give us a better picture of the time frame for resolution whatever that may be. Once we have this, it will provide at least some clarity for the eurozone economy and the euro.
US China trade talks are ongoing with Beijing heading to Washington this week to continue where they left off last Friday. Last week’s post meeting out-takes and headlines continued the theme that we could get a positive outcome which will help to defuse trade tensions and boost global economic confidence. There still appear to be some barriers to overcome but I doubt the White House wants anything other than a ´successful´result. We should get resolution this quarter hopefully, sooner than later.
Add this to the just published China manufacturing PMIs which showed a decisive beat on expectations (both the Caixin and State data) and we could be seeing concerns re China’s economy receding.
We have also had the tom toms talking up a recession via the inverting / inverted US yield curve. But as far as I can tell there appears to be two sides to this story.
On the one hand we have analysts saying that such an event has always been a precursor to recession. But there are others who down play this. I won´t go into the detail but the discussion now seems to be whether this particular event is being over played.
We know that there are always perma bears who look for anything to encourage their world view just as there are eternal optimists. From my stand point it looks to me that the US economy is in pretty good shape and US equities don´t look like heading decisively south right now (gapped up last night). Today’s retail sales data out of the US will be important regarding this story.
In summary, we have Europe possibly showing some green shoots of tentative recovery, US China trade talks continuing with the media not seemingly looking to the downside of the resulting outcome, Brexit nearing some type of major inflection point and China printing decent data. Is Spring in the air for the global economy?
These are just my musings and it’s a complex world in which we live so anything can and will happen. But my take right now is that there are a number of things adding to the asset side of the register rather than to the liabilities column.
In which case we could see risk taking hold, recessionary threats softening and perhaps a weaker dollar.
Barring any black swans or the fact that I´m simply stone cold wrong (a distinct possibility :)) such a scenario could help boost the eurusd. Time will tell as the old (and incredibly useless from our pov) adage has it!
Moving on… I have updated the model performance here. Not a great month by any stretch but hopefully we will get back to some better results is month.
For today we have US retail sales and ISM manufacturing PMIs out this afternoon.
The Weekly Chart
While we are talking about the bigger picture, it’s worth a look at the weekly chart for a change.
As you can see we have followed up the bearish doji with another solid down move last week. As I said last week we could be looking to form a slightly lower range in the eurusd from a chart perspective. But we didn´t take out the 1.1175 low or the 1.12 level.
Maybe this is a sign of some up move to come as per the above macro comments. From a technical pov though, it doesn’t look good and we have the void I mentioned last week lower down the chart. So technically we could be looking lower. Mixed view here so what do we do? We do what we see and what the chart tells us. If anything from above starts to gain traction we should head a little higher at the outset of the month. If not, the downside looks favourite.
The Hour Chart
Levels and zones as per.
We held the Friday lows overnight as we kicked off the week as equities gapped up in Europe and the US. I will be looking at the price action as we start the regular hours trading session this morning and in particular how we react at the 12.50s and 80s. Pushing up and and through I´ll be looking for retests to get long in the first instance. Should we reverse from the open I´ll be looking at Fridays lows initially as a stop run.
I have placed S1 and R1 a bit further out from where I might normally be looking for a reaction for the purposes of improving the outcome of our model performance but I would recommend watching 12.50 and 80 on the upside and 12.00 (near enough Friday lows) and trading accordingly if you are able to be at your charts.
Looking forward to this week as I have a feeling it could be instrumental in how we go forward.
Have a good one and at all times watch your risk but don´t forget to engage :).