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FxPro
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EURUSD Wave Analysis

  • EURUSD broke support area
  • Likely to fall to 1.100

EURUSD under bearish pressure after the earlier breakout of the support area lying between the support level 1.1060 (which reversed the price twice in December) and the 50% Fibonacci correction of the previous upward ABC correction (2) from September.

The breakout of this support area accelerated the active impulse waves 3 and (3).

EURUSD is likely to fall further toward the next support level 1.100 (former double bottom from November).

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USDCHF Wave Analysis – 03 February, 2019

  • USDCHF reversed from support area
  • Likely to rise to 0.9710

USDCHF recently reversed up sharply from the support area lying between the key support level 0.9630 (low of the previous daily Morning Star) and the lower daily Bollinger Band.

The upward reversal from this support area stopped the earlier short-term impulse wave 5 – which started earlier with the daily Evening Star from the resistance level 0.9765.

Given the strong bearish sentiment affecting the Swiss franc – USDCHF is likely to rise further toward the next resistance level 0.9710.

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FX majors and Dow Jones are close to important milestones

All three major American indices have updated their historical highs, adding more than 1% on Wednesday. Futures on the index are growing on Thursday morning after another portion of good news. Here are just a few of them: the spreading of coronavirus has slowed sharply, Chinese doctors reported a breakthrough in vaccine development, extremely positive news on the US labour market in January and China announced that it will halve tariffs on 1717 US import products.

Shanghai’s China A50 blue-chip index won back 70% of the decline after markets opened on Monday. The U.S. Dow Jones added by more than 1.5% on Tuesday and Wednesday and is trading close to 29500 this morning, adding 1300 points this week. With such bull run, 30K level may be taken as early as this week, attracting additional interest from market participants and spreading the positive vibes to other markets.

This growth of stock indices must not be connected with expectations of policy easing. Purchases strengthened on the back of solid employment data from ADP, which showed the jobs increase by 291k in January. A little later, the positive agenda was supported by higher than expected activity of indices in the service sector. Both Markit and ISM estimates unanimously show stronger growth since September-October, responding to lower rates and liquidity injections from the Fed and trade talks progress.

Strong statistics caused markets to reassess the chances of new policy easing from the Fed. This turn in expectations supported the dollar, which added 0.9% against the basket of six major currencies to the two months highs. The key currency pairs approached the critical round levels, too.

EURUSD declined to 1.1000, to area where it received the buyers’ support since November. The publication of Friday’s statistics may confirm or weaken this trend. Healthy US data is likely to bring back into the market focus the bright contrast between the US and Europe growth in favour of the former.

The same goes for GBPUSD. The British pound slipped below 1.3000, a kind of waterline of the last three years. The pair traded lower THAN this level during the periods of investors’ anxiety for the economy after Brexit.

USDJPY is testing 110, another crucial round level, as the outcome of the struggle for it may be decisive for the trend of the next days and even months.

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GBPJPY Wave Analysis

  • GBPJPY reversed from support area
  • Likely to rise to 143.40

GBPJPY recently reversed up from the support area lying between the pivotal support level 141.00 (which has been reversing the price from October), lower daily Bollinger Band and the 38.2% Fibonacci correction of the pervious upward impulse wave (C).

The upward reversal from this support area stopped the earlier short-term impulse wave 3.

GBPJPY is likely to rise further toward the next resistance level 143.40 (top of the pervious short-term corrective wave 2).

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Euro sinks under 1.1000, aiming lower

Still, there are significant differences between the growth of European and American indices in the form of dynamics of local currencies. U.S. markets are moving upwards amid positive macroeconomic data. At the same time, the effect of previous actions of the Fed has not yet fully reached the economy, tuning investors for even more significant improvement in the coming months.

A different story in Europe. Industrial production reports published since the last week in Germany, France, and Italy showed a decline of 6.8%, 2.8% and 4.3% YoY, respectively. Germany factory orders dropped 8.7% YoY, the lowest since 2009, becomes a further worrying indicator.

Adding to the pessimism is that all these reports refer to December, long before the coronavirus problem appeared on investors’ radars. Therefore, these data, often having a very short-term effect on the euro rate, this time launched a sale of the single currency from levels, where it previously got support. Very cheerful American statistics confirmed the contrast in these regions, opening the way for EURUSD to decline from psychologically important level 1.10.

Strictly speaking, the pair declined under this level on Thursday but traded close to this line, pulled away only on Friday and developed decline on Monday to 1.0900 area by Tuesday morning.

The nearest support level may be the area 1.0880, where the Euro pushed off in early October. However, Germany is also a major exporter to China and not just an importer. Therefore, its growth rate may suffer much more than the U.S.A. in the coming months, requiring more stimulus accordingly.

The difference in the current figures and the nearest forecasts explain the significant pressure on EURUSD, opening the way to the further decline of the pair to 1.0750 by the end of the month. This decline fits into the general pair’s downtrend, formed in 2018 with the first volleys of the trade wars. But the coronavirus outbreak may become the factor that would accelerate the decline of EURUSD to 1.05 area or even lower before the 1Q20 end.

If by the middle of the year, the U.S. keeps healthy growth rates, while Europe and China continue to suffer, it is reasonable to expect EURUSD to decline close to parity by the third quarter.

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Gold sets records in euro and strives even higher

Apple has returned to the market fear of the coronavirus’ impact on the economy. The company said that the recovery of supply and sales might be delayed. Such reports from the most expensive US company, supported by a portion of cautious comments from RBA, have returned to the markets demand for save-heaven assets and was beneficial for gold.

Earlier this morning, investors saw in RBA’s recent protocols hints for policy easing preparedness.

Gold prices rose above $1,585 per troy ounce, coming close to January high when prices reached 7-year peaks. The value of gold in the euro since this morning reached record levels above €1,465 mainly due to the single currency weakening.

So far this year, the growth of gold was enhanced by two different drivers. The most frequently mentioned one is the demand for gold as insurance during times of geopolitical instability and financial markets storms. For this reason, gold strengthened on the news of Iranian-US conflict and at the peak of coronavirus fears.

Another reason is the demand for gold as a means of preserving capital against inflation. Massive stimulus from various central banks eventually spurred up commodity prices around the world. Last week, macroeconomic reports across the globe clearly showed an increase in consumer price growth rates. This effect can continue to gain momentum as the People’s Bank of China and other Asian central banks strengthen the easing policy. At the same time, the Bank of Japan and the ECB repeatedly say they are ready to “strengthen monetary easing”. Now RBA has joined this company.

We see that waves of fear in the markets alternate with periods of hope that the central banks’ stimulus will work. Last week, a second factor dominated, pushing stock indices up around the world. At the same time, European and US markets were updating their historic highs.

But even with softening of fears gold was experiencing moderate correction kickbacks, maintaining the upward impulse formed in December. Moving upwards from one consolidation area to another, the gold price may grow up to levels around $1,700 (last observed in early 2013) or even jump to $1,800 (peak values of 2012) in the coming months.

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What’s dragging EUR down: then trade wars, now the coronavirus

 

The single currency fell to 3-year lows against the dollar as indices of German and US business sentiment published the day before sharply contrasted with expectations. The ZEW Indicator for Germany is referred to as a leading economic indicator. This time, it unpleasantly surprised economists. The February data showed a sharp decline from 26.7 in January to 8.7 in February. The assessment of the current situation also stopped improving. It went deeper into the negative territory, showing the deterioration of evaluations over the past eight months.

Immediately after the release of this data, the euro tried to keep above 1.0830 but then failed at 1.08, where it remains today under the pressure of US data.

The New York Federal Reserve’s Empire State business conditions index jumped from 4.8 to 12.9, the highest level since May last year, in response to Fed stimulus and partial trade agreement with China.

Overall, both US and European businesses are vulnerable to global trade problems and business cautiousness due to coronavirus effects. Both America and Europe provide a similar response to threats by softening monetary policy. Time after time, we see that business in the US is quickly returning to the norm, while Europe is facing some challenges for an extended period after the release of data.

Such imbalance causes the euro/dollar pair acts as a stabilizer, moving in favour of stronger counterpart. Recently, the markets are increasingly afraid that Europe might need new monetary stimulus. At the same time, we see more often the US could cope with the situation. The weakening of the euro against the dollar may well continue in the coming weeks and months until we see a reversal of the fundamental indicators.

It is also interesting that the European currency is inferior to the pound. The EURGBP dropped yesterday below 0.83, the low area since 2016, as the robust labour market statistics helped the sterling. The data on the growth of unemployment claims only by 5.5K in January can hardly be called healthy: over the last three years, we saw the monthly decline only three times. Still, these figures turned out to be much better than the forecast for an increase of 20.2K. It turns out that UK’s official exit from the EU did not turn into a barrage of layoffs, and the unemployment rate at the end of the year remained at multi-year lows.

At the same time, the euro is testing multi-year lows against the two most popular competitors at once: the dollar and the pound. The weakening of the currency is considered as a boon for the economy in the medium term, as it spurs export growth. However, this weakness of the euro is now a sign of disease in the region’s economy. It may continue until the emergence of “green shoots” from the economic indicators.

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The dollar index has been growing almost daily in February, adding 2.5% from the beginning of the month to its peaks from May 2017. The dollar index tracks the USD against the six most popular world currencies, where the yen and the euro can be considered the main catalysts for a decline, having lost 3.0% and 2.6%, respectively.

Nevertheless, smaller and secondary currency pairs also deserve traders’ attention, the movement in which is a kind of manifestation of profound processes of financial markets. Judging by these movements, the longstanding carry-trade idea becoming obsolete, as the high-yielding currencies of emerging markets are no longer highly profitable and the central banks of these countries are softening their policies in the attempt to revive economic growth.

Against the backdrop of the coronavirus epidemic and the Chinese authorities’ efforts to stimulate the economy, the Yuan is weakening. The Dollar is again worth more than 7 Yuan due to the easing of monetary policy of the authorities and fears of investors about a sharp cooling of China’s economic growth. The 7.0 mark was and remained an essential barometer of sentiment in China. The price dynamic above this level reflects the continued uncertainty in markets about future growth prospects. In early 2017 and late 2018, the Yuan was heavily protected by PBC near this level. The signing of Phase One trade agreement also returned the renminbi underneath this waterline. However, the demand for the Dollar pushed the pair higher earlier this week.

The weakness of the Yuan and the Chinese economy also affected the Australian Dollar. AUDUSD is declining again this week, updating its 2009 lows below 0.67. It was a kind of waterline at 0.70, and the pair failed its attempt to climb higher at the end of last year.

A separate story is a Turkish Lira. This currency does not depend on problems in China so that it can be viewed as a different story. The USDTRY broke through 6.0 this week, following another cut of the rate by the Turkish Central Bank. TCMB has been more focused on reviving economic growth in recent months, rather than curbing inflation.

The steady downward trend of the lira against the Dollar has been observed for more than a month, and last week the pair crossed the 6.0 level, returning to last year’s highs. Above the current mark (6.08) the pair was only in May 2019 and from August to October 2018 during the period of extreme volatility in the pair. It seems that now the markets are trying to find the “ceiling” for the pair, the growth above which will be sensitive for the policymakers, forcing them to stand up for their currency.

The same can be said about the South African Rand, which crossed the mark of 15.00 in USDZAR, which was repeatedly tested for strength in recent years but did not stay long. The weakening of the Rand against the Dollar looks more surprising as it is happening against the background of robust gold price growth, that previously determined the price direction of ZAR.

The Ruble still stands aside from the general trend in EM currencies for weakening. USDRUB is moving below 64.00, which is markedly under the peak area of recent years by 70.

On the one hand, it indicates the strength of the Russian currency: investors are not in a hurry to sell it during the period of high demand for Dollar. However, history suggests that like a real Russian, the Ruble may “gather its thoughts” for a long time, and then drop even harder than others.

As the actions of the Russian central bank and government become more and more inflationary, the risks are rising that the Ruble will rush to catch up to the world in pursuance of weakening against the Dollar.

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