Fundamental Forecast for EUR/USD: Neutral
– Futures positioning stays a vital snag for a Euro, with net-long positioning during a uninformed 2017 high and a top turn given May 2007.
– The ECB won’t be lifting rates in 2018 though will continue with a normalization process, expected withdrawal a Euro though a executive bank as a poignant motorist in a near-term.
– The IG Client Sentiment Index suggests softened conditions for EUR/USD in a entrance days.
The Euro finished nearby a bottom of a vital currencies lonesome by DailyFX Research final week, dropping a many opposite a antipodean sisters (EUR/NZD -2.34%; EUR/AUD -2.03%), with no other waste in additional of -1%. EUR/USD was hardly reduce by -0.20% (but finished Friday quite poorly) and EUR/GBP was a hold higher, by +0.32%.
At a Dec process meeting, a European Central Bank offering a identical comment of a rate expectations and brazen superintendence as it did during a Oct iteration. Concurrently, it’s near-term GDP and acceleration forecasts (2018 and 2019) were upgraded, though a 2020 acceleration foresee was not, highlighting a ‘cautious optimism’ process officials are observation a recovery.
While this means traders competence be unhappy that no rate hikes are entrance subsequent year, it does meant that normalization is good underneath way, that should keep a Euro upheld for a foreseeable future. Unfortunately, this leaves a Euro though a European Central Bank as a poignant motorist streamer into 2018. The sputter effects are small, though important: if ECB process is deemed to be on a set march for a subsequent several months, it competence meant cost movement around typically critical releases like a CPI or PMI reports is dampened going forward.
In a week ahead, a Euro sees a quieter mercantile calendar than final week, no warn in a run-up to a Christmas holiday. The final Euro-Zone CPI news for Nov shouldn’t leave most in a arise on Monday. Otherwise, a German IFO news should have minimal impact on cost movement on Tuesday, as will a final Q3’17 French GDP news on Friday. Likewise, during a week between Christmas and New Year’s, we shouldn’t demeanour to a calendar as a poignant source of eventuality risk.
Heading into a final dual weeks of 2017, a Euro has organisation fundamentals ancillary it. Economic information movement is plain and stays nearby multi-year highs, with a Euro-Zone Citi Economic Surprise Index finishing Friday during +70.3, adult from +60.1 a week before and still aloft than +58.9 a month ago. The final PMI readings for Nov expelled so distant have showed that expansion movement in a Euro-area is during a strongest gait given 2011.
Taking a demeanour during market-derived indicators of cost pressures, the 5-year, 5-year acceleration barter forwards, one of ECB President Draghi’s elite gauges of inflation, sealed final week during 1.705%, a hold reduce than a 1.708% reading a week earlier, though still aloft than a 1.670% reading a month ago. Given that Euro strength has postulated itself over a past few months, justification that acceleration expectations continue to trend aloft should put to rest any near-term concerns that a ECB competence have over tapering a gait of a item purchases as a calendar turns into 2018.
We still trust that a biggest barrier to serve Euro strength lies not with a ECB or arriving mercantile data, or even politics streamer into a final dual weeks of a year; though rather where marketplace positioning stands. The Euro prolonged trade in a futures marketplace remains crowded among speculators/non-commercial traders.
According to a CFTC’s latest COT report, there were 113.9K net-long contracts hold by speculators for a week finished Dec 12, thehighest level given a week finished May 15, 2007. After positioning appearance in May 2007, EUR/USD forsaken over a subsequent 4 weeks for a detriment of only over -3%.
While this isn’t adequate information alone to act on a contrarian brief Euro position, it is adequate of a reason to quell a unrestrained about a Euro’s differently softened fundamentals, suggesting that choppy, laterally operation trade is due by a finish of 2017 – and if debility does transpire, it’s merely a jam-packed marketplace holding increase on Euro longs.
This was creatively created on Dec 17, 2017.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
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