Daily Analysis | 21 November 2017
EUR/USD traded in a very volatile manner yesterday, amid a plethora of political updates from Germany. The world’s most traded currency pair rebounded notably during the European morning Monday, following reports that Chancellor Merkel was going to meet with German President Steinmeier, possibly on speculation that she was going to announce something encouraging, like continued efforts to form a coalition or the formation of a minority government. However, Merkel announced that she prefers new elections instead of leading a minority government, pouring cold water on expectations that this deadlock will be resolved swiftly. This caused EUR/USD to plunge lower again, aided also by some USD strength throughout the day.
Political uncertainty is still high in Germany, mainly due to the fact that a coalition or a minority government appear less likely with each successive day. With Merkel having effectively signaled her willingness to go to early elections, uncertainty is unlikely to go away anytime soon, as any new election would likely occur in early 2018 and a new government may not be in place until Q2 2018. Needless to say, these would be discouraging news for investors anticipating institutional reforms in the EU, given that such an outcome will at the least delay any reforms. As for the euro, it is likely to remain very much headline-driven in the near-term. News of stability in Germany could help the currency to recover, whereas signs of continued uncertainty could keep it under pressure.
EUR/USD rebounded from near the 1.1725 (S1) support line during the European morning Monday, breaking above the 1.1760 (R1) level to find resistance below the 1.1825 (R2) hurdle. The rate subsequently retreated following Merkel’s statement that she favors early elections, to meet support once again near 1.1725 (S1). The rate continues to trade within the sideways range between 1.1680 (S1) and 1.1825 (R2) and as such, the short-term outlook is still neutral in my view. A clear break below 1.1680 (S1) is needed to shift the outlook to negative. On the other hand, a close above 1.1825 (R2) could signal that the slide that began on the 8th of September was simply a corrective move and that the broader picture has turned back to the upside.
Support: 1.1725 (S1), 1.1680 (S2), 1.1620 (S3)
Resistance: 1.1760 (R1), 1.1825 (R2), 1.1870 (R3)
RBA minutes drag AUD a little lower
Overnight, the RBA released the minutes of its November policy meeting. Even though the overall tone of the minutes was somewhat neutral, there were a couple of concerned comments, with the Bank reiterating its concerns around wage growth and the exchange rate. It noted that there is “considerable uncertainty” on how quickly wages might pick up and that any further rise in AUD would weigh on the economy as well as future inflation. The reaction in AUD was slightly negative at the release of the minutes, most likely due to the aforementioned remarks. Overall, these signals from the RBA enhance our view that any interest rate increase appears to be a very long way off in Australia, especially considering that wage growth remains subdued as was confirmed by the wage price index for Q3.
AUD/USD traded somewhat lower overnight, following the release of the RBA minutes. The pair continues to post lower lows within the downside channel that has been containing the price action since mid-September and as such, the outlook still appears to be negative. Thus, I would expect the bears to take the reins again soon and push the price lower, perhaps for a test of the 0.7500 (S1) support territory. A clear break below that zone could set the stage for more bearish extensions and initially aim for the 0.7470 (S2) barrier.
Support: 0.7500 (S1), 0.7470 (S2), 0.7440 (S3)
Resistance: 0.7570 (R1), 0.7635 (R2), 0.7770 (R3)
The economic calendar is almost empty today as well, with the only major indicator we get being the US existing home sales for October.
As for the speakers, we have two on the schedule: Fed Chair Janet Yellen, as well as ECB Executive Board member Benoit Coeure. Markets could focus mainly on Yellen’s comments, following news yesterday that she will not stay on as a Fed Board Governor when her term as Chair ends next year.
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