EUR/USD – Euro Subdued as Markets Look for Cues

The euro is showing limited movement on Tuesday, as EUR/USD trades slightly below the 1.04 line. On the release front, German PPI posted a gain of 0.3%, above the estimate of 0.1%. The Eurozone’s current account surplus increased to EUR 28.4 billion, easily beating the forecast of EUR 24.2 billion. There are no US releases on the schedule.

The Eurozone economy has shown some improvement in growth and inflation data, so it’s no surprise that confidence indicators have been pointing upwards in the fourth quarter. In Germany, Ifo Business Climate improved  to 111.0 points in December, its highest level since April 2014. Investors and analysts also remain confident about the economy, as underscored by the December ZEW Economic Sentiment reports. The German indicator remained at 13.8 points, although this was short of the forecast of 14.2 points. The Eurozone report jumped to 18.1, beating the estimate of 16.5. These figures point to optimism over growth aspects in the Eurozone and in Germany.

Last week’s Federal Reserve rate hike sent the euro reeling, and the currency has again dipped below the 1.04 level. Currently, EUR/USD is trading at its lowest levels since January 2003. If the decline continues, we’re likely to hear growing talk about parity between the US dollar and the euro, which last occurred in December 2002.

When the Federal Reserve raised interest rates in December 2015, the Fed confidently predicted a series of rate hikes in 2016 in order to keep a hot US economy in check. However, the Fed remained on the sidelines throughout 2016 and refrained from any rate hikes until last week. There were several false starts along the way, as expectations that the Fed would raise rates earlier in 2016 failed to materialize. This led to sharp criticism of Janet Yellen for failing to provide a clear monetary policy. Yellen seems to have been keenly aware of this, as the Fed did everything short of buying advertisements in daily newspapers to get out the message that it planned to raise rates in December. Indeed, a rate hike was priced in as high as 100% by some analysts. Yellen should certainly be commended for a clear message to the markets.

With the one rate hike in 2016 behind us, what’s next? In September, Fed officials said they expected two rate hikes in 2017, but the Fed is now projecting three or even four hikes next year. However, projections need to be adjusted to economic conditions, and the markets will understandably be somewhat skeptical about Fed rate forecasts. As well, the wild card of Donald Trump could also play a critical role in monetary policy. Trump’s economic platform remains sketchy, apart from declarations that he will increase government spending and cut taxes. Still, there is growing talk about ‘Trumpflation’, with the markets predicting that Trump’s policies will increase inflation levels, which have been persistently weak. If inflation levels do heat up, there will be pressure on the Fed to step in and raise interest rates.

EUR/USD Fundamentals

Tuesday (December 20)

• 7:00 German PPI. Estimate 0.1%. Actual 0.3%
• 9:00 Eurozone Current Account. Estimate 24.2B. Actual 28.4B

*All release times are GMT

* Key events are in bold

EUR/USD for Tuesday, December 20, 2016

EUR/USD December 20 at 9:45 GMT

Open: 1.0402 High: 1.0418 Low: 1.0375 Close: 1.0382

EUR/USD Technical

• EUR/USD was flat in the Asian session and has posted small losses in European trade
• 1.0287 is providing support
• 1.0414 was tested earlier in resistance and is a weak line

Further levels in both directions:

• Below: 1.0287, 1.0170 and 1.0028
• Above: 1.0414, 1.0506, 1.0616 and 1.0708
• Current range: 1.0287 to 1.0414

OANDA’s Open Positions Ratio

EUR/USD ratio remains unchanged in the Tuesday session. Currently, long positions have a majority (56%), indicative of trader bias towards EUR/USD reversing directions and moving upwards.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.